Taxation TSN 3 Exam Coverage Summary

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Taxation TSN 3 Exam Coverage

Based on the Lectures of Dean Manuel P. Quibod
AUGUST 28, 2013
Taxable income means pertinent items on gross income
specified in this code less the deductions and/or personal
exemptions of any authorized in this code or by special
laws. So to arrive at a taxable income, you have pertinent
items of gross income less the deductions and/ or personal
or additional exemptions, if any is authorized of such type
of income or other special laws.
Gross Income Deductions (Business/ Trade or Prof) &
Personal Exemptions/ Additional Exemptions, if applicable
(eg. Cost of Living) = TAXABLE INCOME
Your taxable income is the tax base. So there are income
tax payers who are not entitled to deductions but they are
entitled to personal or additional exemptions. Such in the
case of purely compensation income earner who are not
entitled to deductions arising from business/trade or
practice of profession like in the case of corporation, they
do not have such exemptions but they are entitled of plain
deductions in business and trade. Individuals who are
engaged in business/ trade or practice of profession are
entitled to deductions arising from business/ trade as well
as personal and/or additional exemptions. Personal and
additional exemptions will take care of appropriate case of
living. The cost of living, the actual expenses of cost of
living are not deductible. The law sets a limit how much it
is only entitled depending on what the Congress will
provide. Under the NIRC the law provides the allowable
personal exemptions and additional exemptions for
dependents. So there are taxpayers who are not entitled to
deductions whether to personal or additional exemptions.
So their gross income is without deduction so the taxable
income as the tax base or rates for those types of income.
Now, in the case of deductions, you have Sec. 34,
SEC. 34. Deductions from Gross Income. - Except for
taxpayers earning compensation income arising from
personal services rendered under an employer-employee
relationship where no deductions shall be allowed under this
Section other than under subsection (M) hereof, in
computing taxable income subject to income tax under
Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1),
there shall be allowed the following deductions from gross
income;
Taxpayers under Sections 24 (A), 25 (A), 26, 27 (A), (B) and
(C); and 28 (A) (1), they shall be entitled to claim
exemptions from their gross income.
Our deductions are categorized as follows:

(A) Arising from Business, Trade or practice of
professions:
- Whether you are an individual or corporate,
you shall be entitled to claim these
deductions arising from Business/trade or
practice of profession. These are classified as:
1) Itemized deductions under Sec. 34 (A-J):
a. Expenses;
b. Interests;
c. Taxes;
d. Losses;
e. Bad debts;
f. Depreciation;
g. Depletion
h. Charitable & development contributions
i. Research and Development;
j. Pensions & trusts
These are the only itemized deductions allowed to be
charged against gross income, when the individual or
corporate taxpayer is engaged in business/ trade or practice
of profession, as provided under Section 34 (A-J).
The taxpayer may also ought, may it be corporate or
individual except non- residents to avail of what we call the
Optional Standard Deduction or OSD, based under Sec. 34
(L).
2) Optional Standard Deduction (OSD):
a. Individuals: 40% x gross sales/gross
receipts
b. Corporation: 40% on Gross Income
OSD is not applicable in the case of Non- resident alien
(NRA). NRA individual who is engaged in business or trade
is only allowed of the itemized deduction. In the case of
domestic and resident foreign corporations you have the
citizens and resident aliens; they are entitled to claim
itemized or the standard deduction. Meaning, pili lang sila
if 1) itemized deduction or 2) optional standard deduction
as to what is the method of deduction they want to claim in
their trade of deduction. For NRA, only the itemized
deductions.
The other group of deduction is the Special Deduction.
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(NB of Dean: the classification made is not the exact
grouping. This is for the purposes of classifying and
identifying them from the other group of deductions)
3) Special Deductions peculiar only to certain
types.
a. Premium
Payments
and
Health
&
hospitalization Insurance under Section 34
(M)
b. Insurance Companies under Section 37
c. Income Distribution & Beneficiaries of
Estates & Trusts under Section 61 (A). These
are on top of the exemptions beneficiaries
can claim of the Estates or Trust Deductible
Item arising from business, trade or
profession.
As a matter of principle, deductions are of Legislative grace.
It is up to the State through its law making body to allow
through its income taxation system to grant deductions.
This is because the State may tax all income if it wants to or
income at gross without the benefit of deduction. The State
may do that. However, under our income tax law system, it
grants deductions to those individuals or corporate
engaged in business/trade or profession. It is because in
deriving an income it incurs expenses. So when they are
engaged in business they have to have funds for the salaries
of their employees, unlike compensation income earners,
they do not employ workers for such income. Purely
compensation income earners do not claim such deduction
but only those engaged in business/ trade or practice of
profession. If they are engaged in business, they borrow
money to be used in the business. The interest would incur
for as long as the expense was made for business/ trade or
practice of profession, such interest can be claimed as
deduction. Taxes which are paid in business are considered
to be deductions or loss, embezzlement and fire incurred in
relation to business/trade or profession.
You also have deduction from bad debts. So, for example
you have a debtor who keeps on avoiding you then nagTNT na xa with no certainty of paying you.
You also have depreciation, like in the case of delivery
truck. It is not chargeable outright because this type of
expenses extends beyond one taxable year, so you claim the
deduction as depreciation.
You also have depletion, wherein peculiar only to mining

industry or wastings. Their investments and facilities, they
claim their deductions over a period of time within which
they can have the minerals extracted from the land or what
we call depletion process.
You also have those by recognizing the taxpayers social
responsibility. That he made income; he made profit, so he
extends his generosity by giving contributions to charity
which are again, deductable from gross income.
You also have those for research and development, which
are related to business. Like information technology. In this
type of business, there expenses for research and
development are also deductable.
Lastly, you have pensions and trusts. It is where the
employer sets a pension or retirement fund for their
employees. So the money that they contribute to the
pension trust is also deductable from the gross income.
However, if the employee does not want to avail the said
pension device, he begs off, a no questions ask deduction of
40% will be deducted on his gross income. You did not
have receipts so practically only 60% is the one taxable
because you are only allowed to deduct 40% of it.
This has been increased because before, only 10% is
deductable. Practically, 90% is deductable.
Now, you also have this second group of deduction. The
OSD. The third group is the special deductions.
The other category, aside from those arising from business,
trade or profession deductions, are what we call the
EXEMPTIONS. The term exemption is not exempted
items but it is used to answer for the cost of living,
especially individual tax payers. Your actual cost of living
like in the cost of rental of house, food, education of your
children and etc are not actually outright deductable but
you can consider it as under personal exemptions.
However, the law only allows certain limit which is to cover
this type of expenses, which are categorized as personal
exemptions.
B. Exemptions
1. Personal exemptions
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-pertaining to the taxpayer himself. You have the citizens
and resident aliens entitled to personal exemption of 50K,
under sec. 35 (a)
- non- resident alien engaged in trade or business, under
Sec. 35 (d). The amount is whichever is lower between
Filipino exception and foreign personal exemption on the
basis of reciprocity. The amount of exemption must not
exceed the maximum we can give.
In our case, our personal exemption is 50k. In the case of
NRAETB, if in their country gives a personal exemption to
our Filipino Non- residents there, then we also give a
similar exemption to their non- resident alien here in our
country. The next question is how much is the amount that
we will grant them? It will be whichever is lower between
the exemption given in their country or the personal
exemption given here in the Philippines. So for example, if
in their country, a personal exemption of 30k is granted
then here in the Philippines, we are only allowed a personal
exemption of 50k, then we will grant those NRAETB a
personal exemption of 30k. If for example, in their country
a personal exemption of 60k is granted and here in the
Philippines, only 50k, then they will be granted of 50k
personal exemption.
- you also have personal exemptions for Estates and trusts
under Sec. 62. The amount is still the old amount which is
20k. but by omission, the applicable personal exemption
now is 50k, similar to the regular individuals.
Aside from this personal exemptions, we also have another
group of exemption which we call the Additional
Exemption.
2. Additional exemptions
- Additional Exemption will ONLY cover qualified
dependents of the citizens and resident aliens under Sec. 35
(b). The amount of exemption is 25, 000.00 each but not
exceeding 4 dependents. The qualified dependents in this
section are the children of the taxpayer. Secytion35
provides the qualifications and criteria for the taxpayer to
avail of the 25k each exemption. For purposes of
exemption, if both spouses are working or engaged in
business/ trade or profession, each of the spouses can claim
50k each for their additional exemption. The spouses are
treated as separate tax payers, that is why they can also
claim for additional exemption but it does not exceed 50k

each.
These are the scope for us to arriving what we call as
taxable income.
Going back to deductions under category A, those arising
from business, trade or profession, the income within
which you can charge these deductions whether itemized
or OSD, are related to business, trade or profession.
So if the income there pertains to dividends from abroad,
then you are a resident citizen, you cannot claim for the
deductions arising from that income because it is not in the
exercise of business, trade or profession. Yet, they are
taxable and subjected to the same rates but no deductions
can be charged on these items because the deductions that
you can charge from those income are those pertaining to
business, trade or profession.
In the case of exemptions, both personal and additional,
they are applicable to individual tax payers. So you have
citizens or resident aliens, whether they are compensation
earner or engaged in business or profession. In this case,
non-resident alien engaged in business or trade are entitled
only to personal exemption, but the citizens and resident
aliens are entitled to claim the additional exemption.
Walang additional exemption sa mga non- resident as well
as sa estates and trusts.
Lets go to these items..
You have Section 34 (A) Expenses. Please have the
requisites for the deductibility of expenses to business,
trade or professional expenses under Section 34 (A), which
pertains to ordinary and necessary expenses related to
business or profession and their deductibility.
The deduction from gross income includes all the ordinary
and necessary expenses directly connected with the tax
payers business or trade.
In 34 (A) there should be allowed a deduction from their
income of all the necessary and ordinary expenses paid or
incurred during the taxable year in carrying on or which are
directly attributable to, the development, management,
operation and/or conduct of the trade, business or exercise
of a profession.
So for purposes of their deductibility, you have the
requisites.
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1.
The expenses must be ordinary and necessary.

- Ordinary means that the deduction is
attributable and chargeable within the tax
year. Necessary means it is in connection with
the business, trade or profession of the
taxpayer.
- Salaries and wages are considered as
necessary because they are needed in the
operation of the business and they are
chargeable within the tax year. The rental
expense that you use for the space that you
rent. These are part of your business expenses.
However, there are legitimate expenses which
are necessary but not ordinary. Like in the
case of CIR v General Goods, decided on April
24, 2003.
In this case, the company had advertising
expenses. Advertising expenses were of two
kinds. The 1)advertising to stimulate the
current sale or merchandise or use of services
and 2) advertising designed to stimulate the
future sale of merchandise or use of services.
1) advertising
to
stimulate
the
current sale or merchandise or use
of services
- must be ordinary and necessary so you can
charge them as business expense uder 34 (A).
2) advertising designed to stimulate
the future sale of merchandise or
use of services
- in this case, the advertisement is not only
designed for this taxable year but extends
beyond the current taxable year.
- If its a legitimate business expense, you
cannot treat them as deductible outright. For
example, you engaged an advertising firm,
during the tax year, you entered into a 10year
contract to promote a product you are selling
and the advertising expense is 50M. so now
that you entered that contract of 50million,
will you know claim it as a deduction on that
current taxable year even if the contract says
for a period of 10years? No, so that is what is
meant in the second type of advertising which
is designed to stimulate future sales of
merchandise or use of services.
- The rule here is that the expense is not only
during the current year but also extends
beyond the current year, then the deduction

will be allowed but not the entire amount. In
other words, you are to pro- rate or amortize
the expense over a period of time that would
be beneficial to the tax payer.
Going back to that advertising expense,
wherein they agreed to have it for 10 years at
50M, then you can amortize the 50M for
10years. So you may amortize the 50M on a
straight line basis which is 50M/ 10years. So
you have 5M each year as recognition of an
advertising expense for the next 10 years. This
is because this is no longer ordinary even if it
is necessary.
Remember, to qualify as an outright
deduction, it must be attributable to the
taxable year. But if such expense would
extend beyond the current taxable year, then
you must pro- rate or amortize the expense
over a period of time. It is now on the part of
the taxpayer to determine how long will that
expense will be useful then that expense will
be recognized year in and year out so that it
will now meet the requirement as ordinary
and necessary expense.
The second requirement is that it must be paid or incurred

on the current taxable year.
-
You have this pay incurred when you have an

income as a constructive receipt or actual
receipt in the recognition of income, for the
expense to be paid or incurred. So if you are a
cash basis taxpayer, you recognize income
upon actual receipt, then you also recognize
the deduction upon actual expense. If you are
an accrual tax payer, where you recognize
income on an accrual basis or receipt, you
should also recognize the deduction on an
accrual. Meaning, you incur already the
expense and recognize the deduction even
though the payment of that expense will take
place later. In other words, for purposes of
method of accounting income and deduction
should be consistent. So if you use the cash
basis for accounting the income, you should
also use the same method in accounting your
deduction. If you use the accrual basis or
constructive receipt as a method of
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accounting income, you should also use the
accrual to account deduction. It should not be
a combination because you will violate the
principle of consistency. It is because if you
use the combination, youll end up having an
overstatement or understatement of your
income and deduction. In other words, it
would not be accurate and reasonable
presentation of your taxable income.
The third requirement, it must be paid or incurred in
carrying on the business or trade of the taxpayer. In short,
it must be expenses connected with the business/trade or
profession of the taxpayer.
-
The rental of the condo unit, rental of the

residential house and lot, these are not
deductible because they are not related to the
conduct of business/ trade or profession of
the tax payer.
The fourth requirement is that it must be substantiated

with receipts, records or other pertinent records. There
must be substantiation.
-
Example, mga resibo or acknowledgement to

support the expense.
The fifth, if the expense requires a withholding, then a

corresponding withholding shall be made. Otherwise, like
salaries, the tax payer is required to make a withholding on
the salary of the employees. If the employer fails to get the
withholding tax on the salaries, then the deduction will not
be allowed.
Sixth, the expense must not be contrary to law, public
moral, public policy.
-
Kickbacks, bribes, are not deductible expense.
Those are elements/ requirements for deductibility.

As mentioned in 34 (A), the expense for salaries, wages and
other forms of compensation, they are deductible. The
fringe benefit in their gross up monetary value is
deductible. The fringe benefit tax is also deductible. Not
under Section 34 (A) but under other tax law. Travel
expenses and allowances related to trade or business,
deductible. Rentals and other payments or dues in relation
with trade or business are deductible. Entertainment or
amusement purposes as long as they are for trade, business

or profession, they are deductible.
There are expenses which are ordinary and necessary like in
connection with salaries, wages and other form of
compensation of the employees, who are tax payers.
Ordinarily, these salaries and wages that you pay, including
board and lodging, other forms of benefits, except those
what we call as de minis they are tax free, they form part
of the compensation and they are what we call as
deductible. Now, there are forms of compensation which
are deductible to the tax payer but not taxable income to
the employee. Like the doctor would have a driver because
the doctor has to be on call, so the doctor has to provide
board and lodging or living quarters. So the corresponding
value of the quarters or the board and lodging are
deductible expenses of the doctor because it is part of his
practice of profession.
In the hands of that driver, the employee, that is income
but they are not taxable because they are what we call
expenses which are for the convenience of the employer.
You have this Principle of the Convenience of the Employer
Rule wherein the board and lodging or the expenses, living
quarters, are incurred for the convenience of the employer,
then they are not taxable income to the employee but they
are deductible expenses to the employer.
You also have expenses in pursuit of business, trade or
profession of the employer. Let us say those med reps, sales
agents and etc, where the employer will provide
representation. For example, gasoline allowance and travel
expenses. These are legitimate business expenses in the
hands of the employer and thus they are deductible. In the
hands of the employee who received these forms of
benefits, the travel, gasoline, representation allowances, are
they income? Remember, in the hands of the employer they
are expenses but in the hands of the recipients, are they
income? If the employee/ workers are not required to
liquidate or substantiate these expenses, how they use it, it
will form part of their income. So bibigyan lang sila then
sila, after they sign the vouchers yun na. It is expenses on
the part of the employer but it will now be part of the
income of the employee. This is for the reason that they are
made not required to account what was given to them. But
if they are made to liquidate or substantiate, and the
receipts or any excess are to be returned, then it does not
form part of the employees income. In this case, it will be
an expense to the employer but not an income to the
employee.
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In number 2 of 34 (A), you have expenses peculiar to
private educational institutions allowable as deductions,
referred to in Section 27 (B), may at its option elect either:
(a) to deduct expenditures otherwise considered as capital
outlays of depreciable assets incurred during the taxable
year for the expansion of school facilities or (b) to deduct
allowance for depreciation thereof under Subsection (F)
hereof.
Itong mga nasa 27(B), sila yung mga proprietary
educational institution. Like when they buy or purchase
school busses or equipment to be used for educational
purposes. The taxpayer educational institution has 2
options: if they spent for the purchase of that school bus
then they have the option to deduct the actual cost of the
bus as an outright expense under 34 (A) or they may have
that school bus claimed as a deduction under 34 (F) by way
of Depreciation. Kasi diba the scholl bus will depreciate
thru time. So again, they can claim it as 1. Outright
deduction under Section 34 (A) or 2. Depreciation under
Section 34 (F).
SEPTEMBER 3, 2013
Going back to section 34 a, deduction for expenses, you
have section 34a to j, which are the allowed itemized
deduction. No other deduction are allowed if they are
outside those mention in section 34 a to j. however in the
case of section 34 a, on expenses, this will cover almost all
deductible items for as long as they are ordinary and
necessary for business or trade or professional expenses.
Hihigopin lahat ng clasing expenses as deductible if they
are in connection for ordinary and necessary for business,
trade or professional expenses. Regardless of the term or
account title that is being called upon form that title for as
long that it is called upon under the requisite of 34 a as
ordinary and necessary expenses, then pasok na yan and
you can allow deduction.
There is no strict determination because the leeway is given
to the tax payer. The tax payer is given the requisite to
allow deduction. For as long as the fall within the requisites
then pasok yan. So if they do not fall under the requisites
for there deductibility under 34a, the chances are these
expenses, deduction is not allowed.
The next item is 34b. In General. - The amount of
interest paid or incurred within a taxable year on
indebtedness in connection with the taxpayer's
profession, trade or business shall be allowed as
deduction from gross income: Provided, however,

That the taxpayer's otherwise allowable deduction for
interest expense shall be reduced by an amount equal
to the following percentages of the interest income
subjected to final tax:
Forty-one percent (41%) beginning January 1, 1998;
Thirty-nine percent (39%) beginning January 1, 1999;
and
Thirty-eight percent (38%) beginning January 1, 2000;
We are dealing here with interest expense. Interest
expense payment for the use or forbearance of money
regardless of the name it is called or its denomination.
When you are the barrower, borrowed money from a
lender and there is an interest that is charged. Is the
interest deductible? No, its not. For it to be deductible it
must be an interest in connection with the trade, business
or profession. So when it was a borrowing for the use of the
repair of the house, repair of the residential home, then the
interest expense is not deductible. The fact that you
borrowed money and the loan is covered with interest, and
they are being used in connection with the BTP, then, it
would be deductible. It must be one connected with the
BTP.
Then you have the exception, provided however,
that the taxpayers otherwise allowable deduction for
interest expenses, shall be reduced by 42% of the interest
income subjected to final tax provided that effective
January 1 2009 the percentage shall be 33%.
This exemption is what we called tax arbitrage
rule. The application of this is peculiar only, on transaction
where the taxpayer would borrow money and the money
use to invest on securities or money placement where
interest income is earned and the interest income has been
withheld as a final tax. The tax of the interest income has
been subject to a final tax.
The interest expense that would be allowed as deduction
will not be anymore 100% but it will be reduced by 33 % of
the interest income subjected to a final tax. The taxpayer
allowable deduction for interest income shall be reduced to
33% of the interest income subjected to the final tax.
Ex. Let say you borrowed 500thousand. The
interest is 10% so the interest here is 50thousand. This
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would be the interest expense that you would incurred for
this loan o 500thousand. However, the 500thousand where
used to invest on money placements earning interest
income. The proceeds of the loan were used for money
placements earning interest income where the interest
income has been subjected to a final tax. The interest
expense of 500thousand, 50thousand, is not deductible to
Let say the interest income that will be earned from
investments would be 30thousand. The interest income will
be earned from this investment is 30 thousnd, the law does
not allow to deduct interest expense 30thousand but this
will be less to 33% of the interest income. In which case,
this will be 30thousand times 33%. It is about 9800.
The interest income earned from where the
proceeds of the loan was used is 30thousand, however the
interest expense from your loan from which you used the
proceeds to invest on interest income investments, the
50thousand interest expense would be reduced to 33% of
the interest income. So we have 9800. The allowed
deduction -= 50thousand -9800= 41200
As a rule interest expense is deductible when it
partakes borrowing where the proceeds are those in
connection with BTP.
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The exception is on the 2 part that Provided, however,

That the taxpayer's otherwise allowable deduction for
interest expense shall be reduced by an amount equal to
the following percentages of the interest income subjected
to final tax, shall be reduced now 33% of the interest
income subjected to final tax.
The tax arbitrage rule applies only when you
borrowed money where the proceeds were used on money
placement where interest income is earned and the interest
income is subjected to final tax. Since the interest expense
there is deductible, the law does not allow to deduct the
entire 50 thousand you borrow from your interest as
deductible in full. The interest expense will be reduced by
33 percent of the interest income. The interest income that
you earned from the proceeds of the loan you used on this
investments is 3o thousand. Now, this 30 thousand will be
claimed as a deduction against the actual interest expense
but not the entire 30 only 33%. So the 33% of the interest
income from the 30 % interest income earned is 9800. So
the interest expense is reduced by 33% of the interest
income resulting to the allowed interest deduction only
40,100 and not the entire 50 thousand.
Again that is applied only when the transaction

involves a tax arbitrage rule. It is not applicable as a rule
but only in a peculiar situation.
Exceptions. - No deduction shall be allowed in respect
of interest under the succeeding subparagraphs:
- In other words aside from the exception under paragraph
1 of 34 b, you have other exception on the non-deductibility
of the interest income.
(a) If within the taxable year an individual taxpayer
reporting income on the cash basis incurs an
indebtedness on which an interest is paid in advance
through discount or otherwise: Provided, That such
interest shall be allowed a a deduction in the year the
indebtedness is paid: Provided, further, That if the
indebtedness is payable in periodic amortizations, the
amount of interest which corresponds to the amount
of the principal amortized or paid during the year shall
be allowed as deduction in such taxable year;
- in paragraph A, this contemplates taxpayers, individual
taxpayers on cash basis. Remember that cash basis on
individual taxpayers reports income on the basis of actual
receipt and also reports deduction on the basis on actual
deduct.
Ex. If you are a cash basis taxpayers in 2011, in 2011 you have
income of 100thousand. In 2011 you also borrowed money
with interest of 5thousand. In 2012, ung 100 thousand was
received and 5 thousand was paid to the lender.
Under this set of transaction, if you are a cash basis
individual taxpayers the income in 2011 is not recognized as
income because it was only received in 2012. So the income
of 100thousand is income for tax year 2012.
In terms of deduction you borrowed money in 2011, interest
was already running because you borrowed money at that
time. You paid only the lender for the interest of 5
thousand only on 2012. So the interest expense is
deductible in 2012. 5 thousand is not a deductible expense
in 2011 but on 2012. Thats the scenario if cash basis
individual.
However, the law will disallow interest expense. In other
words, if you borrowed money in 2011 where the interest is
for 1 year and you borrowed this let say on July 1 2011 and
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interest was paid in advance. Technically the entire 5
thousand will be a deduction, interest expense, will be
deductible in 2011 because you pay it in advance being an
actual taxpayers. So the entire 5 thousand as interest
expense will be claimed as a deduction in the year 2011. Kasi
you pay the entire 5 thousand in 2011 when the interest pala
will cover of 1 year. Supposedly from July 1 2011 to June 30
2012.
- ito yung tinatawag natin borrowing between related

taxpayers. So borrowing between related taxpayers wherein
interest expense is incurred the interest expense no
deduction shall be allowed by interest expense between
borrowing between related taxpayers under 36 b.
WHO ARE THOSE RELATED TAXPAYERS
36 (B) .
So, under this situation you are not allowed to

claim the entire 5 thousand interest expense. What you are
allowed to deduct is if within If within the taxable year an
individual taxpayer reporting income on the cash basis
incurs an indebtedness on which an interest is paid in
advance through discount or otherwise: Provided, That such
interest shall be allowed a a deduction in the year the
indebtedness is paid: Provided, further, That if the
indebtedness is payable in periodic amortizations, the
amount of interest which corresponds to the amount of the
principal amortized or paid during the year shall be allowed
as deduction in such taxable year
In other words for 2011 the 2011 allowed deductible
interest expense will only cover the period of 2011. What is
that period? July 1 2011 to December 30 2011. And that is
part of the 5thousand. Only 2500 will be recognized as the
deduction. In 2012, the other half so 2500 covering from
January 1 2012 to December 31 2012. That is the meaning
when the law said no deduction shall be allowed. This
means that you are not allowed to claim the entirely of the
5 thousand. The allowed deduction for interest expense will
cover only in so far that , that has been incurred during the
tax year. HOW MUCH INTEREST WAS SUPPOSEDLY
INCURRED DURING THE TAX YEAR WHEN YOU
BORROWED THE MONEY? Only a portion covering from
July 1 2011 to December 31 2011. So that covers a period of 6
months so that is half dba. So that covers the allowable
deduction. The other balance will be claimed as a tax
deduction for another year. That covers the application of
the interest expense being incurred by a cash basis
individual taxpayer.
CLEAR BA YON? PLEASE LET ME KNOW. (Yesyesyoh)Oh noh
(b)If both the taxpayer and the person to whom the
payment has been made or is to be made are persons
specified under Section 36 (B); or
1.
2.
3.
4.
5.
6.
Between members of a family. For purposes of this

paragraph, the family of an individual shall include
only his brothers and sisters (whether by the whole
or half-blood), spouse, ancestors, and lineal
descendants; or
(2) Except in the case of distributions in liquidation,
between an individual and corporation more than
fifty percent (50%) in value of the outstanding stock
of which is owned, directly or indirectly, by or for
such individual; or
(3) Except in the case of distributions in liquidation,
between two corporations more than fifty percent
(50%) in value of the outstanding stock of which is
owned, directly or indirectly, by or for the same
individual if either one of such corporations, with
respect to the taxable year of the corporation
preceding the date of the sale of exchange was under
the law applicable to such taxable year, a personal
holding company or a foreign personal holding
company;
(4) Between the grantor and a fiduciary of any trust;
or
(5) Between the fiduciary of and the fiduciary of a
trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of
such trust.
(c)If the indebtedness

petroleum exploration.
is
incurred
to
finance
The indebtedness is not deductible. It does not mean you

cannot deduct the interest. There is other way to claim the
deduction. This could be done by way of depletion. it is
because in exploration to mining ect. is not deductible
outright. It will be added to the cost of exploration and
claim as a deduction in the process of the depletion. Now
you claim the deduction covers a period of time within
which in the process of their extraction they will be
rd

depleting the minerals resources. Let say in the extraction
process, the mines will be depleted for a period of 15 years,
then you amortized the expenses for the next 15 years.
Again as a rule the interest expense incurred in
indebtedness by petroleum exploration is not deductible
NO. 3
(3) Optional Treatment of Interest Expense. - At the
option of the taxpayer, interest incurred to acquire
property used in trade business or exercise of a
profession may be allowed as a deduction or treated as
a capital expenditure.
This contemplates like
Under the herein transaction, the taxpayer borrowed

money to purchase the truck. The interest expense is added
to the cost of the truck and claim as a capital expenditure
and therefore the deduction is through depreciation. The
other option is to have the interest expense claim as an
outright deduction under 34 b as an interest expense. Then
the cost of the delivery truck as a deduction under 34 f.
34 (C) Taxes.- as deduction those in connection with
the taxpayers BTP.
(1) In General. - Taxes paid or incurred within the
taxable year in connection with the taxpayer's
profession, trade or business, shall be allowed as
deduction, except
Ex. When you purchase a delivery truck in a business and

you borrowed money to purchase it. Like, the taxpayers
borrow 1 million for the purchase. This sale has an interest
of 4 % per annum which is to be paid within 2 years. This
you will pay 40thousand per annum for two years so times
2 80 thousand- this will be your interest.
The basic rule on taxes are those in connection with the

taxpayer BTP. So in case on taxes the following are
exempted- hindi pweding I deduct ito against the gross
income:
The issue now under this set of transaction the

taxpayer has the option to have the interest expense added
as part of the cost of the delivery truck. So the total cost of
the delivery truck which was initially acquired by 1 million
by borrowing money, you made add the interest expense as
part of the cost of the product. So 1Million 80thousand na
sya. This will be the total cost of the truck. The deduction
will be gain through the process of depreciation under 34 f.
This is ONE OPTION.
- while it is a tax, it is not a deductible tax.
ND
The 2
option is to recognize the interest expense,
individually or separately. One, the delivery truck separate
from the cost and deduction through depreciation.
The interest expense claim as a deduction as a separate
identity- in other words, the interest expense shall be
treated separate to the cost of the truck.
The other option is to add interest expense of the delivery
truck plus the cost of the truck to form part of the total cost
of the delivery truck. This option of deduction is the
depreciation. This is what it meant by this provision- At the
option of the taxpayer, interest incurred to acquire property
used in trade business or exercise of a profession may be
allowed as a deduction or treated as a capital expenditure. (
ung interest expense is treated as a capital expenditure)
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign

country; but this deduction shall be allowed in the
case of a taxpayer who does not signify in his return
his desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to credits for
taxes of foreign countries);
- this means the foreign income tax that you pay. Who are
the taxpayers on all sources? Resident citizen and domestic
corporation. They may have an foreign income tax pero it
can still be subject to deduction. However we have under
34c where in the foreign income is not claim as a tax credit
and not anymore a tax deduction.
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind
tending to increase the value of the property assessed.
NOTE: Provided, That taxes allowed under this Subsection,
when refunded or credited, shall be included as part of
gross income in the year of receipt to the extent of the
income tax benefit of said deduction.
rd

This last part is what we call the tax benefit rule on
refunded taxes. It say that when refunded or credited, shall
be included as part of gross income in the year of receipt to
the extent of the income tax benefit of said deduction. So
contemplate a situation wherein you claim a tax deduction.
Ex. Later you discovered that that tax is not payable or
there was a mistake in payment so you file a refund which
you previously claimed as a deduction. You refund was
granted and you will be issued a tax credit certificate. Now
in the hands of the taxpayers which was granted the
refund. Is that an income? Now it depends. If at the you
claim the tax deduction, like real property tax, by reason of
such deduction it reduce your taxable income you pay a
lesser tax. Here you are able to have an income tax remedy
be reason of that deduction.
Having discovered that you over pay the real property tax,
you apply for a refund under the LGU. The LGU will give
you the refund and issue you a certificate. The question is
taxable income bah sya? If there was an income tax benefit
of that tax at the time it was deducted, then upon recovery
or refund that it will be an income. If there was no tax
benefit at the time the deduction was made upon its
recovery there was no income recognized. So it will depend
whether at the time of the deduction there was a tax
benefit. Later on we will encounter another tax benefit
under bad debts.
(2) Limitations on Deductions. - In the case of a
nonresident alien individual engaged in trade or
business in the Philippines and a resident foreign
corporation, the deductions for taxes provided in
paragraph (1) of this Subsection (C) shall be allowed
only if and to the extent that they are connected with
income from sources within the Philippines.
- Here we will go back to this later. This involve the foreign
income tax.
Lets go to Losses
10
Ex. Supposed if during the tax year a portion of your

building was lost by fire, damage by fire and you are not
compensated/covered by an insurance, then the entirety of
that loss was a deduction.
If you are covered by an insurance, and your loss for
example is 500thousand but the insurance merely gave you
300thousan, only the 200thousand is deductible.
If let say during a taxable year you have a fire loss of
500thousand and the determination of the loss didnt
arrived on such taxable year, like meron investigation, the
final determination of the loss was later. In what year shall
be the fire loss recognized? What is the rule? The fire loss
shall be claimed on the year the losses actually sustained
during the taxable year. It was on the year it was actually
sustained. The losses as a deduction shall be claimed in
that year it was ascertain. Remember if full indemnity by
insurance, there will be no deduction. Only in case where
partial indemnity lang.
CASUALTY LOSSES- there is a reportorial requirement.
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or
profession, if the loss arises from fires, storms,
shipwreck, or other casualties, or from robbery, theft
or embezzlement.
The Secretary of Finance, upon recommendation of
the Commissioner, is hereby authorized to
promulgate rules and regulations prescribing, among
other things, the time and manner by which the
taxpayer shall submit a declaration of loss sustained
from casualty or from robbery, theft or embezzlement
during the taxable year: Provided, however, That the
time limit to be so prescribed in the rules and
regulations shall not be less than thirty (30) days nor
more than ninety (90) days from the date of discovery
of the casualty or robbery, theft or embezzlement
giving rise to the loss.
D) Losses. as long in connection to the taxpayer BTP.

(1) In General. - Losses actually sustained during the
taxable year and not compensated for by insurance or
other forms of indemnity shall be allowed as
deductions:
(c) No loss shall be allowed as a deduction under this

Subsection if at the time of the filing of the return,
such loss has been claimed as a deduction for estate
tax purposes in the estate tax return.
rd

(2) Proof of Loss. - In the case of a nonresident alien
individual or foreign corporation, the losses
deductible shall be those actually sustained during the
year incurred in business, trade or exercise of a
profession conducted within the Philippines, when
such losses are not compensated for by insurance or
other forms of indemnity. The secretary of Finance,
upon recommendation of the Commissioner, is hereby
authorized to promulgate rules and regulations
prescribing, among other things, the time and manner
by which the taxpayer shall submit a declaration of
loss sustained from casualty or from robbery, theft or
embezzlement during the taxable year: Provided, That
the time to be so prescribed in the rules and
regulations shall not be less than thirty (30) days nor
more than ninety (90) days from the date of discovery
of the casualty or robbery, theft or embezzlement
giving rise to the loss; and
NOLCO
(3) Net Operating Loss Carry-Over. - The net operating
loss of the business or enterprise for any taxable year
immediately preceding the current taxable year, which
had not been previously offset as deduction from
gross income shall be carried over as a deduction from
gross income for the next three (3) consecutive taxable
years immediately following the year of such loss:
Provided, however, That any net loss incurred in a
taxable year during which the taxpayer was exempt
from income tax shall not be allowed as a deduction
under this Subsection: Provided, further, That a net
operating loss carry-over shall be allowed only if there
has been no substantial change in the ownership of the
business or enterprise in that
- In case of NOLCO is simply the result of you operation
resulted in losses. In other words, you have more expenses
than income. So you operation resulted to what we called a
net operating loss. The taxpayer will be allowed to carry
over the loss for the next 3 consecutive taxable years to
claim them as a deduction against the gross income.
The requirement is that, there should be no substantial
change in the ownership of the business. so sa loob ng 3
th
years. If kung may balance ka for the 4 year, marami ng
loss, its your option kng magpapatuloy kappa. What is not
allowed is there is a substantial change in the ownership.
11
Ex. The taxpayers sold his shares. They still maintain the
corporate name, pero ung mga tao sa look iba na ang mayari. Can they claim NOLC? There is a change in ownership.
4) Capital Losses. (a) Limitation. - Loss from sales or Exchanges of
capital assets shall be allowed only to the extent
provided in Section 39.
(b) Securities Becoming worthless. - If securities as
defined in Section 22 (T) become worthless during the
taxable year and are capital assets, the loss resulting
therefrom shall, for purposes of this Title, be
considered as a loss from the sale or exchange, on the
last day of such taxable year, of capital assets.
Capital Losses- are not deductible against the taxable
income. they are deductible when you have a capiutal gain.
We will discuss this when we are in section 39
(5) Losses From Wash Sales of Stock or Securities. Losses from 'wash sales' of stock or securities as
provided in Section 38.- not deductable to gross income.
(6) Wagering Losses. - Losses from wagering
transactions shall b allowed only to the extent of the
gains from such transactions.
This is what we called gambling gains. These are not
deductible to your gross income. so these are deductible
only when you have gambling gains.
(7) Abandonment Losses. (a) In the event a contract area where petroleum
operations are undertaken is partially or wholly
abandoned, all accumulated exploration and
development expenditures pertaining thereto shall be
allowed as a deduction: Provided, That accumulated
expenditures incurred in that area prior to January 1,
1979 shall be allowed as a deduction only from any
income derived from the same contract area. In all
cases, notices of abandonment shall be filed with the
Commissioner.
(b) In case a producing well is subsequently
abandoned, the unamortized costs thereof, as well as
the undepreciated costs of equipment directly used
rd

therein , shall be allowed as a deduction in the year
such well, equipment or facility is abandoned by the
contractor: Provided, That if such abandoned well is
reentered and production is resumed, or if such
equipment or facility is restored into service, the said
costs shall be included as part of gross income in the
year of resumption or restoration and shall be
amortized or depreciated, as the case may be.
Abandonment losses- are deductible against gross income.
But there application takes place only on the mining on
wasting assets. It arises when after going into commercial
production it ended up that your estimate where not
accurate. Like estimate mo for 10 years ang extraction pero
next day wala na pala. How are you going to recover those
expenses? Then you claim now as abandonment losses.
SEPTEMBER 4, 2013
Sec. 34 (E) BAD DEBTS - Bad debts are what we call
receivables of the taxpayer by reason of his on account of
trade or business or the exercise of a profession. So
taxpayers whether self employed or engaged in business
would also have what we call collectibles. So you have
customers or clients but it will take them some time to pay
or you may have business with them but on credit so you
have what we call receivables or accounts receivables.
However, this receivable despite demands the debtors
would take time to pay the amount to such a point that
they will hide or escape and the creditor exhaust efforts to
collect the indebtedness against these debtors. So as
taxpayer now, the debtor will charge therefore as what we
call bad debts and a certain debt to be worthless and could
no longer collectible. Now, prior to ascertaining it is no
longer collectible or worthless efforts must be made by the
taxpayer to ascertain them they are already worthless and
could no longer be collected.
Burden of proving that the debts are already uncertain and
could no longer be collected is on the hands of the
taxpayer. If the BIR would find that there was no basis to
make them as worthless receivables or as bad debts then
the deduction might be disallowed. So now the burden is
on the part of the taxpayer to prove. What are these proofs
which the taxpayer is required?
Sending of demand letters: Taxpayer must show that
demand letters were sent to the debtor. Then, despite
12
demand letters it was ignored then you file a case. A

collectors case. For as long as there are evidences or proofs
that the debt could now be worthless then you can charge
it as bad debts. There are taxpayers wherein they would age
account receivables. Like they would age this receivable is
uncollected 60 days, 90 days, 120 days, etc. So after 120 days
the debt could no longer be collected then they would
charge it now to bad debts. That is not the correct practice/
way of determining worthlessness. Aging of accounts
receivables as basis to determine bad debts is not a proper
way to claim a deduction for bad debts. Again, the burden
is on the part of the taxpayer to determine the
worthlessness of the receivables or collectibles.
As a rule, debts due to the taxpayer actually
ascertained to be worthless and charged off within the
taxable year except those not connected with
profession, trade or business and those sustained in a
transaction entered into between parties mentioned
1
under Section 36 (B) of this Code . So you have theses
requisites for the purpose of their deductibility. So when
you have bad debts between parties mentioned under sec.
36(B) then it is not deductible or when you have
collectibles which are not in connection with your
profession, trade or business and they are also not
deductible. Like yung kapitbahay nagutang sayo ng pera at
napapansin mo na parang tahimik na yung kabilang bahay
and then yun pala lumayas na, hindi mo na masingil yung
utang. Yung utang that is a collectible or a receivable. You
could not claim that as bad debts because it did not arise
because of your profession, trade or business. Personal
receivable on the part of the taxpayer.
Exception:
Provided, That recovery of bad debts
previously allowed as deduction in the preceding
years shall be included as part of the gross income in
the year of recovery to the extent of the income tax
benefit of said deduction.
So you have this rule on bad debts recovery. Earlier, we
have in the case of taxes under 34 (C) what we call the tax
benefit rule on taxes refunded or credited and you have
also the application of the tax benefit rule on bad debts
recovery.
The rule in the recovery for taxes is the same rule we apply
in bad debts recovery. Only when there is tax benefit that
1
Sec. 34(E) par.1 NIRC
rd

the recovered bad debts will be taxable. So this means that
at the time the bad debts were claimed as deduction, the
deduction resulted to a tax benefit. Later on, the debts were
recovered. In the hands of the taxpayer will he recognized
the bad debts recovery as taxable income? In the event now
that there is tax benefit at the time the deduction was made
so in the case of recovery it would be taxable income. But if
at the time that deduction for bad debt was made there is
no tax benefit that redound to the benefit of the taxpayer
then, in the event of recovery there is no need to recognize
a taxable income.
Securities becoming worthless. You have this also in the
case of LOSSES in 34 (D) on paragraph 4 these items of
securities becoming worthless. You have the same rule
there.
If securities, as defined in Section 22 (T), are
ascertained to be worthless and charged off within the
taxable year and are capital assets, the loss resulting
therefrom shall, in the case of a taxpayer other than a
bank or trust company incorporated under the laws of
the Philippines a substantial part of whose business is
the receipt of deposits, for the purpose of this Title, be
considered as a loss from the sale or exchange, on the
2
last day of such taxable year, of capital assets.
When securities become worthless you may treat them as
bad debts or losses. If the taxpayer is in the business of
buying and selling securities from the stock market, stock
broker/ trader, in the inventory of your stocks which you
sold to the public, you have a set of securities where the
corporation involved have already ceased operation or shut
down. Can you still sell these securities? NO MORE. They
have become worthless. If you are engaged regularly in that
business then you may treat them as bad debts or losses
BUT if you are not in that business, like a lawyer and you
are investing in stocks and some of the stocks have ceased
mabebenta pa ba yan? NO. So worthless. They would
amount as losses BUT you cannot claim them as a
deduction because you are not in that business. Can you
claim them as deduction? YES. Not as deduction against
gross income but treated as capital assets and the securities
becoming worthless treated as capital losses.
When we go to section 39 these capital losses are
deductible only when you have capital gains. The capital
2
Sec. 34(E) par.2 NIRC
13
losses can never be deductible on your gross income. They

can only be deductible when you have capital gains and
when you have capital losses it means that these securities
are your capital assets which have become worthless.
Sec. 34 (F) DEPRECIATION Depreciation are properties
used in business which are subject to exhaustion or what
you call wear and tear. It is also called a cost recovery
method because in accounting parlance the acquisition of
this types of properties are what you call capital
expenditures. Like for example the delivery truck used in
business, office equipments, computers, typewriters, office
furniture and tables etc. So when they were built or
constructed or purchased, they are legitimate business
expenses but you could not claim them as deduction under
34 (A) because they are not ordinary and necessary
expenses but the manner within which the deduction could
be claimed is under 34 (F) through the process of
depreciation. In other words, this property used in business
would be claimed as deduction by depreciating them for a
period of time within which this property would be useful
in business.
For example: A delivery truck; useful for the next 10 years
then, you will now depreciate or amortize the cost of that
delivery truck for the next 10 years through a method of
depreciation. Deduction may be a fixed amount or a
graduated amount depending on the method you use to
depreciate the property. So at the end of that period the
property now is what you call fully depreciated. When you
have fully depreciated the property then you have
recovered the cost of the property because the deduction
would not be claimed outright. So every year meron kang
iclaim na depreciation amount then the following year and
th
th
so on until the 10 year. By the end of the 10 year you have
now fully depreciated and you have also at the same time
recovered the cost.
(1) General Rule. - There shall be allowed as a depreciation
deduction a reasonable allowance for the exhaustion, wear
and tear (including reasonable allowance for obsolescence)
of property used in the trade or business. In the case of
property held by one person for life with remainder to
another person, the deduction shall be computed as if the
life tenant were the absolute owner of the property and
shall be allowed to the life tenant. In the case of property
held in trust, the allowable deduction shall be apportioned
between the income beneficiaries and the trustees in
rd

accordance with the pertinent provisions of the instrument
creating the trust, or in the absence of such provisions, on
3
the basis of the trust income allowable to each.
5 years
180,000 per year
(for the next 5 years)
Annual
14
Depreciation
(2) DECLINING BALANCE METHOD Depreciation rate = 1/estimated life x 2 OR 1.5

Depreciation rate = 1/5 x 2
Depreciation rate = 2/5
Depreciation rate = 40%
Pro-rating or allocating the depreciation. (par.1)
Depreciation expense = Book value x rate
Now, there are several methods which the taxpayer may
use in determining the manner of the depreciation.
Year
Cost
(2) Use of Certain Methods and Rates. - The term

'reasonable allowance' as used in the preceding paragraph
shall include, but not limited to, an allowance computed in
accordance with rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the
Commissioner, under any of the following methods:
0
1
2
3
4
5
1,000,000
1,000,000
600,000
360,000
220,000
132,000
(a)
The
straight-line
method;
(b) Declining-balance method, using a rate not exceeding
twice the rate which would have been used had the annual
allowance been computed under the method described in
Subsection
(F)
(1);
(c)
The
sum-of-the-years-digit
method;
and
(d) any other method which may be prescribed by the
Secretary of Finance upon recommendation of the
Commissioner.
The taxpayer is given a leeway to the method of
depreciation. The rule is for as long as that property is used
in business then you can claim depreciation as a deductible
item against gross income.
Given: Truck cost = 1,000,000
Life 5years
Scrap Value = 100,000
(1) STRAIGHT LINE METHOD stretch the depreciation
over the useful life of the property
Cost Scrap Value
= Annual Depreciation
Estimated Life
1,000,000 10,000
= Annual Depreciation
3
Depreciation
rate
40%
40%
40%
40%
40%
(3) SUM-OF-THE-YEARS
METHOD
Depreciation
Expense
400,000
240,000
140,000
88,000
-
DIGIT
METHOD
Book
Value
1,000,000
600,000
360,000
220,000
132,000
-
SYD
Annual Depreciation = no. of remaining life x cost scrap

value
Sum of the years *(1+2+3+4+5)
AD1 = 300,000 (rounded off) = 5years x 1,000,000 100,000
15*
AD2 = 240,000= 4years x 1,000,000 100,000
15*
AD3 = 180,000= 3years x 1,000,000 100,000
15*
AD4 = 120,000 (rounded off) = 2years x 1,000,000 100,000
15*
AD5 = 60,000 = 1year x 1,000,000 100,000
15*
~ You would end up with a higher depreciation if you use
this method.
(Just read this wala na nagelaborate si Dean)
(3) Agreement as to Useful Life on Which Depreciation
Sec. 34 (F), paragraph 1
rd

Rate is Based. - Where under rules and regulations
prescribed by the Secretary of Finance upon
recommendation of the Commissioner, the taxpayer and
the Commissioner have entered into an agreement in
writing specifically dealing with the useful life and rate of
depreciation of any property, the rate so agreed upon shall
be binding on both the taxpayer and the national
Government in the absence of facts and circumstances not
taken into consideration during the adoption of such
agreement. The responsibility of establishing the existence
of such facts and circumstances shall rest with the party
initiating the modification. Any change in the agreed rate
and useful life of the depreciable property as specified in
the agreement shall not be effective for taxable years prior
to the taxable year in which notice in writing by certified
mail or registered mail is served by the party initiating such
change to the other party to the agreement:
Provided, however, that where the taxpayer has adopted
such useful life and depreciation rate for any depreciable
and claimed the depreciation expenses as deduction from
his gross income, without any written objection on the part
of the Commissioner or his duly authorized
representatives, the aforesaid useful life and depreciation
rate so adopted by the taxpayer for the aforesaid
depreciable asset shall be considered binding for purposes
of this Subsection.
(4) Depreciation of Properties Used in Petroleum
Operations. - An allowance for depreciation in respect of
all properties directly related to production of petroleum
initially placed in service in a taxable year shall be allowed
under the straight-line or declining-balance method of
depreciation at the option of the service contractor.
However, if the service contractor initially elects the
declining-balance method, it may at any subsequent date,
shift to the straight-line method.
The useful life of properties used in or related to
production of petroleum shall be ten (10) years of such
shorter life as may be permitted by the Commissioner.
Properties not used directly in the production of petroleum
shall be depreciated under the straight-line method on the
basis of an estimated useful life of five (5) years.
(5) Depreciation of Properties Used in Mining
15
Operations. - an allowance for depreciation in respect of

all properties used in mining operations other than
petroleum operations, shall be computed as follows: (a) At
the normal rate of depreciation if the expected life is ten
(10) years or less; or
(b) Depreciated over any number of years between
five (5) years and the expected life if the latter is more than
ten (10) years, and the depreciation thereon allowed as
deduction from taxable income: Provided, That the
contractor notifies the Commissioner at the beginning of
the depreciation period which depreciation rate allowed by
this Section will be used.
(6) Depreciation Deductible by Nonresident Aliens
Engaged in Trade or Business or Resident Foreign
Corporations. - In the case of a nonresident alien
individual engaged in trade or business or resident foreign
corporation, a reasonable allowance for the deterioration of
Property arising out of its use or employment or its non-use
in the business trade or profession shall be permitted only
when such property is located in the Philippines.
Related to Depreciation 34 (G) DEPLETION Depletion is
a deduction where the principle is the same as in
depreciation. Still depletion is a cost recovery method.
Business like those in the mining and what you call the
business of oil and gas wells and mines prior to its
commercial production activity they would initially incur
exploration and development expenses. Bago ka pa lang
nagsimula may gastos ka na, how will you recover the
expenses? You recover them when you start now engaging
in commercial activity or commercial trading. So, the
manner of recovery in these expenses is through the
process of depletion you recover theses expenses in
proportion or in parallel with the period of time you are
going to extract the minerals from the land. If you have
fully extract the minerals or deplete the minerals then, you
have already recovered your expenses because when you
start the commercial activity you are not allowed to deduct
exploration and development expenses you will claim the
deduction over a period of time and that will be done
through the process of depletion.
Depletion Rate = Total exploration & development
Expenditures
Estimated units that extracted
Annual Depletion = Depletion Rate x Annual units
rd

extracted
Actual units mined
(etc.)
Given: Exploration and Development = P 1,000,000,000
Estimated units extracted = 1,000,000,000 units
*Determine first the depletion rate. Then, you just
multiply the depletion rate to the actual number of
units extracted.
Depletion rate = P 1,000,000,000
1,000,000,000 units
= P 1.00/ unit
Application of the formula:
st
1 year of operation 50,000,000 units

Depletion in year 1 = 50M units x P 1.00/unit
= P 50,000,000
nd
2 year of operation 100,000,000 units

Depletion in year 2 = 100M x P 1.00/unit
= P 100,000,000
And so on. The theory behind this is the same with
depreciation you want to recover the expenditures
however, when you start the commercial activity hindi mo
pwede bawiin agad yan. The manner within which to claim
them as deduction is through the process of depletion.
th
What happens when on the 5 year of operation kay fully

extracted na? May balance ka pa, wala mo narecover lahat
then, thats what we call ABANDONMENT LOSSES refer
Sec. 34 (D). You have abandoned the mining activity. So
lugi ka talaga diyan.
SEPTEMBER 10, 2013
We are still on the matters on deduction. We have
discussed depreciation, depletion. We go to Section 34 H
Charitable and Other Contributions. If you have noticed
that from Section 34 A to J all these items of deductions are
all related or connected to tax payers trade, business or
exercise of profession. Unlike under 34 H, although this is
a deductible item it does not pertain anything or which is
16
connected to the taxpayers trade, business or exercise of

profession however the law recognizes the tax payers sense
of social responsibility wherein with wealth or income he
was able to waive aside from the taxes he contribute as a
share, the law recognizes and allows that his generosity will
be recognized and that recognition of his generosity the
law allows him to claim deduction with that exercise of his
generosity. So you have Section 34 H allowing deduction of
charitable and other Contributions.
Now there are two major items in this deduction:
1.
2.
Full deductibility
Partial deductibility
In cases of Charitable and other Contributions it may be

given a full or partial deductibility. You have the matter of
contributions given a full deductibility and what are these
deductions which are given full deductibility? You have 34
H 2 Contributions deductible in Full: A. Donations to
government- Is this mere donation? There is a criterion
for the purposes of full deductibility: 1. This must be an
area recognized by NEDA for priority development as
determined by NEDA so while you are allowed to give
contributions to the government but may be all of these
contributions will not be given full deductibility for the
purposes of deductibility it must be one given to an area of
education, health, youth and sports development, human
settlements, science and culture, and in economic
development and you have the key word there according to
a National Priority Plan determined by the National
Economic and Development Authority. So yun yung
crucial element dapat it is within that area kasi if you
would give para sa education, health pero hindi naman yun
area according sa National Priority Plan ng NEDA you will
not be given full deductibility. So you go to NEDA and ask
NEDA kung ano ba yung mga area that you have
determined to be part of the priority plan. Then once you
will know about that then you can give your contribution
otherwise magiging partial deductibility lang yan. So that
is one. B. Donations to Certain Foreign Institutions or
International Organizations- So donations to foreign
institutions or international organizations which are fully
deductible in pursuance of or in compliance with
agreements, treaties, or commitments entered into by the
Government of the Philippines and the foreign institutions
or international organizations so even if you will donate to
these foreign government or institutions but we dont have
such treaty or commitments to these organizations then
donations will only be given partial deductibility so when
rd

we give donations to foreign organizations or international
organizations it should be in pursuit of treaties or
commitments entered into by the government of the
Philippines and the foreign institution or international
organizations like we have treaties and commitments with
the World Health Organization, we give donations or
contributions to find cure for AIDS or SARS so with that
identified the donations will be given full deductibility
otherwise if hindi yun nag-qualify it is still deductible pero
partial lang. C. Donations on Accredited NGOs- So if you
will give something or donate to the NGOs it will be
deductible but the next question will be if it is full
deductibility. For the purposes of full deductibility it must
be an accredited NGO. So if you say accredited, it must be
one with the certification from the BIR. Now under
declarations there is a clearing house for nongovernmental
organizations because if you are a NGO you will become a
donee so to entice donors to contribute to your
organization which is NGO you must tell your donor that
you are an accredited NGO there is accreditation process
there is that clearing house which we call the PCNC-This is
the entity in which all the NGOs or tax exempt
organization will register once they will be given tax
accreditation by the PCNC then they will become an
accredited NGOs or accredited donee institution so once
they have that certification that they are accredited NGOs
then the donors will be comfortable in giving their
donations because they will be given full deductibility and
it will also be exempted from other form of tax. So those
are the benefits for an accredited NGO so if the NGO is not
an accredited NGO the donor will only be given partial
deductibility so for the purposes of deductible in full. You
have 34 H 2: 1. Donations to government; 2. Donations to
foreign institutions; and 3. Donations to Accredited NGOs.
Then we have the matter on partial deductibility. So if the
donee is qualified to the full deductibility then the
donation or contribution will only be given partial
deductibility. So there are set of rules regarding partial
deductibility in 34 H 1- You have the rules there regarding
partial deductibility-Contributions or gifts paid or made
within the taxable year for use of the Government of the
Philippines or any of its agencies or any political
subdivisions thereof exclusively for public purposes, or to
accredited domestic corporations or associations organized
and operated exclusively for religious, charitable, scientific,
youth and sports development, cultural or educational
purposes or for rehabilitation of veterans, or to social
welfare institutions, or to nongovernmental organizations
17
xxxx no part of net income of which inures to the benefit of

any private stockholder or individual in an amount not in
excess of 10% in the case of an individual and 5% in case of
corporation, of the tax payers taxable income derived from
trade, business or profession as computed without benefit
of this and the following subparagraphs. So you have the
case of an individual donor and the case of corporation
donor. For an individual donor you have an amount not in
excess of 10% and 5% for the corporation so the ceiling is
not in excess of 10% in the case of corporation and not in
excess of 5% in case of individuals of the taxable income
without the benefit of deduction.
Example
So lets say an individual has a gross income of 800,000 and
the corporation has the same gross income.
These are the deductions:
Business Expense- 150,000
Taxes- 20,000
Interest- 10,000
Depreciation- 80,000
So these are let us say the deductions then the
Charitable ContributionInstitution
200,000
to
the
Charitable
So you are now will make a comparison between the

whether actual contribution or donation would be given
full deductibility or not or it would subject to 5% or 10%
less deduction because the basis of 5% or 10% is the taxable
income without the benefit of the contribution. So what is
now the taxable income without the benefit of
contribution?
Gross Income
Individual
800,000
Corporation
800,000
LESS
Business Expense 150, 000
150, 000
Taxes
20, 000
20,000
Interest
10, 000
10, 000
Depreciation
80, 000
80, 000
So these are the deductions without the benefit of
deductions kasi you have to compare now what is the
rd

18
taxable income without the benefit of contribution so now

you have:
260,000
260,000
Taxable income 540,000
540,000
without
the
benefit
of
contribution
540, 000 X 10%
540, 000 X 5%
54,000
27,000
So the actual contribution is:
Charitable
200,000
200,000
Contribution
So
kung So between 27,
individual ang tax 000 and 200, 000
payer the actual the corporations
contribution
is allowable
only 200,000, the deduction is only
deduction should 27, 000 you will
only be limited to not be given full
the 10% of the deductibility and
taxable income it not
the
full
should not exceed 200,000 so that is
the 10% of the what you meant
taxable
income that you are only
without
the entitled to partial
benefit
of deductibility.
contribution. So
in
case
of
individual
the
limited
deductible is only
up to 54, 000. So
the
individual
could only deduct
up to 54, 000 as
the
partial
deduction for the
contribution.
Unfortunately, despite partial deductibility you will still be
subject to this test to the limits of what is the equivalent 5%
and the 10% in case of individuals.
for individual and for corporation naman it can only claim

27, 000 or 5% of the taxable income without the benefit of
deduction. So in addition to regular deduction of charitable
and other contributions will only be up to 27,000 so that is
the application of partial deductibility.
So for purposes of determining taxable income, our

example here only have set of deductions but it may have
other deductions for other tax payers but for purposes of
determination on how we can get the 10% or 5%.
Number 2, at the election of the tax payer xxxxx the

following research and development expenditures may be
treated as deferred expenses. So you may have R & D
treated as deferred expenses so in other words during the
tax year hindi mo pa siya ii-claim as an expense because
you may not have specially information and technology,
software development you spend so much to R & D then
So in determining the taxable income now pagdating sa

contributions then it cannot claim 200, 000 but only 54,000
Then you have the deductions for research and

development. Section 34 I. Now Section 34 I is the
deductibility for research and development. Now this is a
new item of deduction introduced beginning 1998 where
this tax law took effect. Prior to 1998 there was no separate
deduction for research and development however, it does
not need, tax payer then they do still have such deduction
for research and development kaso not as 34 I but it is
found there at the ordinary and necessary business expense
under 34 A. And when we go now to the provision of 34 I
for research and development the taxpayer is given 2
options:
1.
2.
To claim the deduction for Research and

development (R & D) he may recognize R&D as
ordinary and necessary business expense which
may be claimed as a deduction under 34 A so for
the current expenses for the tax year for research
and development puwede mo yan siyang i-claim
under 34 A.
The other option is to have the R & D deferred
expense meaning you will accumulate and pile up
the expenses until you will be able to attain the
benefit of the expense. One you have attained the
benefit of expense then you will amortize the
totality of these expenses for a minimum of 60
months to 5 years or more.
So you have in 34 I, tax payer may treat research or number

one, development expenditures which are paid or incurred
by him During the taxable year in connection with his
trade, business or profession as ordinary and necessary
expenses which are not chargeable to capital account so
puwede mo siyang i-claim under 34 A. The expenditures so
treated shall be allowed as deduction during the taxable
year when paid or incurred.
rd

you incur expenses to come up with such product so it took
you let us say 5 years to come up with that product so you
need your expenses to accumulate or piling up until you
come to realize the benefit of the expense. When you say
you have realized the benefit of expense is that you are able
to produce the product and that you are ready to launch
the said product. To produce them for commercial
quantities and now you are going to sell them so with that
accumulation of the expenses because they were deferred
meaning the deduction was suspended hindi mo ii-claim as
a deduction iniipon yan and when you have launched the
product then you can claim the deduction but you are not
allowed the deduction in full let us say you have spent for
research and development over 10 million and in the year
now you have launched the product hindi naman
puwedeng 10 million outright deduction while the manner
of claiming them is to amortized them not less than 60
months meaning that would be 5 years or more so
minimum of 5 years or more as with the elected by the tax
payer when you start claiming beginning at the month in
which the tax payer first realizes the benefits of such
expenditure so let us say this year the people was able to
come up with that product you have already launched the
product to the market so during this year simula mo ng iclaim yung expenses but the period is not less than 60
months so you are given the period of 5 years to amortize
the deduction or the incurred expenses so you have this
option of claiming deduction for R & D.
Then you have 34 J. 34 J is the deduction for pension trusts.
Now this deduction is also a new item similar to R & D but
dati meron din nay an siyang puwesto as a deductible item
which is 34 A pa rin but beginning 1998 they start to
recognize Pension Trusts as a separate item so like R & D it
does not mean that there was no deduction before 1998 of
course meron but not as a separate item but it was
inclusive to 34 A as ordinary and necessary expenses. Now
in the case of pension trusts under 34 J so these are for
retirement funds, retirement trusts so these are the
contributions made by the employer for the pensions or
retirements of their employees now remember that benefits
received under the pension trusts or retirement plan the
recipient employee who will receive the retirement or
pension benefit will be excluded if they will be able to
satisfy the standards required by the employer. Their
employer will set up the standards for the purposes of
retirement either you retire on the basis of NIRC or the
employer has the standard for the purposes of retirement.
Now all of these will be complied the retirement benefit
19
will be given exclusion from taxable income. So in the case

of Pension Trust there are 2 contributions contemplated to
the pension trust.
1.
2.
Refers to the contribution to set up the trust the

pension trusts of the retirement plan kasi when it
is the first time that you set up the fund for the
trust you have to consider the past services of your
current employees so let us say if it is the first time
for the employer to set up the pension trust for the
retirement of his employees and you have
substantial employees that is with you for 5, 10 or
15 years then may initial contribution ka diyan to
set up the pension trust so this will involve a
substantial amount for the contribution.
The second is the annual ito yung regular
contributions to the pension trusts.
Now in so far as to the contribution to set up the pension

trusts the law disallows that you will be given full
deductibility of the contribution that you gave to set up the
fund.
So let us say the contribution to set up the fund. The
employer now wants to set up a retirement plan for his
employees then the employer must provide some
contribution to set up the plans. So let us say the employer
will have the amount of 80 million contributions to set up
the fund and it estimates that the annual contribution to
the fund to open the current length of service let us say you
will have to put in 1 million for the annual contribution. So
what is the deduction, how much will be deductible? In
case to the contribution to set up the plan or trust the tax
payer is not allowed to claim the entire 80 million at once
as a deduction to set up the pension trust, this will be
amortized for the period of 10 years. So you will not be
allowed to claim the entire 80 million when you set up the
fund, the whole 80 million is not deductible you are only
allowed to claim 1/10 so for a period of 10 years for 1/10 you
are allowed to claim the deduction. So for 80 million you
have 8 million for the next 10 years as your deduction.
So in year 1 your actual contribution will consist of the 1/10
of the 80 million which is 8 million plus your annual
contribution of 1 million. So you will have the total
contribution in year 1 of 9 million. This contribution will
continue up to year 10 because the 1/10 will be claimed for a
period of 10 years so 1/10, 1/10 that will go on for the next
ten years so ganito ang magiging itsura ng deduction mo is
the amount that you have spent to set up the fund plus the
rd

annual contribution. In year 11 tapos ng yung amount to be
amortized in year 11 and so forth yung annual contribution
to the pension plan will be claimed as a current deduction
against gross income.
Illustration:
34 J Contributions: PT
1.
2.
Contributions to set-up PT
Annual Contribution-PT
Contribution to set-up PT
80 Million/10 years= 8 million (1/10) for 10 years
Annual Contribution: 1 Million
AC1 (ACTUAL CONTRIBUTION FOR YEAR 1)
1. 1/10 of 80 million=8 million
2. Annual Contribution of 1 million
Total: 9 million
AC10
AC11- Only Annual Contribution of 1 million regular for PT.
The fund used to set up the pension trust will not be given
full deduction you are only allowed to claim 1/10 so under
that 1/10, 1/10, 1/10 ka for the next 10 years. After 10 years
you will just have your regular annual contribution for the
current services.
Now 34 K. So these are additional requirements for
purposes of deductibility especially with this any amount
paid or payable which is otherwise deductible from, o taken
into account in computing gross income or for which
depreciation or amortization will be allowed under this
Section, shall be allowed as a deduction only if it is shown
that the tax required to be deducted and withheld therefrom
has been paid to the Bureau of Internal Revenue in
accordance with this Section, Section 58 and 81 of this Code.
This involves the salaries and wages of the employees will
not be given deductions or deductibility unless the
employer made the corresponding withholding likewise
payments for professionals, the tax payer hired the services
of professional for the legal need of his business or the
accountant or the engineer or etc. While the tax payer pays
for the services rendered there should be a corresponding
20
withholding otherwise the withholding paid to the

professional then the deduction would be disallowed.
To the extent now that professionals are required to post
the schedule of their fees in their respective offices.
Then you have 34 L. The OPTIONAL STANDARD
DEDUCTION or OSD. So from 34 A to J are your itemized
deductions. So 34 L is your separate deduction meaning
that the tax payer can either avail of the itemized
deduction from A-J or if he does not want to use the
itemized then he may opt to avail of the optional standard
deductions. Now in lieu of the deductions allowed the
individual subject to tax other than non-resident alien so
non-resident aliens are not allowed to claim optional
standard deduction especially the non-resident alien
engaged in business or trade because they are only allowed
to use the itemized deductions as a form of their deduction.
So in the case of an individual other than non-resident
alien may elect a standard optional deduction not
exceeding of his 40% gross sales take note that the basis
here is the gross sales or gross receipts as the case may be.
In case of corporations the 40% is based on gross income
that would be the standard deduction. So if you avail of the
standards then hindi mo na kailangang sumingit to add an
itemized or any of the itemized deduction that is outright
deduction. Now if you avail of the OSD or the 40%
allowable we also call that NO QUESTIONS ASK
DEDUCTION form. Hindi mo na kailangang magmaintain the mga resibo at etc. Because the statute of the
law gives you and allows you to have percentage of
deductions. When you avail of a deduction because later
you will learn that tax payers who are engaged in business
or profession are required to file quarterly income tax
returns for quarterly income taxes so over the first 3
th
quarters magbabayad ka ng quarterly taxes now walang 4
quarter instead you have the annual consolidated return so
i-add up yung lahat ng annual or in other words i-annualize
yan , i-annualize less deductions then you have annual
taxable income. So paano yung taxes na binayaran for the
first 3 quarters? They are considered as tax credits. So
th
practically yung babayaran mo nalang is the 4 quarter kasi
th
nabayaran mo na ang first 3 quarters but it is not the 4
quarter return but the ANNUAL RETURN. So now here,
when you avail a type or form of deduction when you file
your quarterly returns hindi ka puwedeng magshishift into
another form or type of deduction in the next quarter. In
the first quarter you chose OSD so OSD ka na tuloy-tuloy
hindi ka na magshift for that tax year pero next tax year
rd

puwede kang magbago kung gusto mo nga itemized but
not that taxable year because you have availed now of a
form of deduction so kung itemized ka sa first quarter
tuloy-tuloy na yang itemized. So unless the tax payer
signifies in his returns the intention of the optional he shall
be considered to have availed the allowed in the preceding
subsection so kung hindi ka mag-avail ng OSD then you are
presumed to chose the itemized. So the next rule here is
that such election conveyed in the return shall be
irrevocable for the taxable year which the return is made
so once sinimulan mo to use the itemized tuloy-tulyo na
during the taxable year or whether you start OSD tuloytuloy na ang OSD so next year puwede mong baguhin at
your option but not any time during the tax year like sa
first year OSD ka sa second quarter itemized ka sa third
quarter nag-OSD sa fourth quarter ka nag-OSD ka NO you
are only allowed to avail one type of mode of deduction!
Now provided that an individual who is entitled to and
claimed for the optional standard deduction shall not be
required to submit his tax return such financial statement
so this is what we call no questions asked wala ka ng iattach-attach. You are not required to submit tax return
with financial statement otherwise required under this
Code especially if you are engaged in business or trade or
practice of profession. Except when the provision otherwise
permits the individual shall give such records pertaining to
his gross income as defined in Section 32 you are allowed to
use simple book keeping for the upkeep and maintenance
of your gross sales or gross receipts. For the corporation
shall keep such records pertaining to his gross income as
defined in Section 23 during the taxable year as may be
required by the rules and regulations promulgated by the
Secretary of Finance upon the recommendation of the
Commissioner..
So you have Section 34 M Premium Payments on Health
and or Hospitalization Insurance of Individual Taxpayer.
The individuals who are allowed to avail of this 34 M are
individuals whose gross income does not exceed 250, 000
so that is the first rule so all taxpayer whose gross income
not more than 250,000 can claim this deduction. Now what
if both husband and wife are both working or engaged in
business etc. or otherwise then the consolidated income so
if the consolidated income would exceed 250,00 then hindi
na sila puwedeng ng 34 M so the ceiling of 250,000 will
cover both spouses who are both working or engaged in
business or otherwise so if they are qualified because they
are earning gross of 250,000 or less then they are entitled to
claim the deduction of 2, 400 per family or 200 pesos a
21
month paid during the taxable year for health and/or

hospitalization insurance taken by the tax payer for himself
including his family shall be allowed for the said deduction
from his gross income. Now in case of married tax payers,
only the spouse claiming the additional exemption for
dependents shall be entitled to this deduction.
Now, one rule when we go to qualified dependents in the
absence of any family conflict it will be the father who is
working or if the wife is working or engaged in business or
profession or the father is the one working or engaged in
business or profession then it will be the father who will
claim for the additional exemption in the absence of any
family conflict. So kung may custody problem now if the
father is the one claiming the additional exemption then it
will be the father who claim for the 34 M for the premium
payments .
Section 35 the Personal and additional exemption. So as we
have outlined the personal and additional exemption will
take care for the personal living and family expenses of the
taxpayer. So the taxpayer will have to pay for the school, to
pay for the rent, to buy clothes, for shelter, etc. However,
these expenses cannot be claimed as a deduction for the
actual amounts. That is prohibited and is disallowed under
Section 36 in computing net income no deduction in any
case maybe allowed in personal livng or family expenses
however, the law sets a limit to how much lang yung
puwedeng i-claim to cover the personal living and family
expenses and under section 35 sets up the limit s of the
expenses so you have the personal exemption of 50,000 to
the individual taxpayer so in the case of citizens and
resident aliens these individual are entitled to claim the
deduction of 50,000 for personal exemption. In case of
married taxpayers who are both working or engaged in
business or profession each spouse is allowed to claim such
personal exemption because they are treated as separate
taxpayers. In the case of married individual where only one
of the spouses is deriving gross income, only such spouse
shall be allowed the personal exemption. And if these
taxpayers have what we call dependents then the tax payer
is allowed to claim additional exemption for their qualified
dependents and for the purposes of dependents in order
the definition that is covered the dependent refers to the
legitimate, illegitimate or legally adopted child chiefly
dependent upon and living with the taxpayer if such
dependent is not more than 21 years of age, so in your case
hindi na kayo qualified so only those 21 or less for your
parents to treat you as qualified dependents unless you are
rd

22
incapable of self-support because mental or physical defect

so puwedeng i-claim ng parents ang personal exemption
nay un regarding the dependents. So regardless of the age
of the dependent who is suffering mental or physical defect
then the additional exemption will be granted. So for the
purposes of cut-off hanggang 21 lang so let us say if in
January 1 you became 21 that will be for the last time you
will claim the deduction or even if you become 21 on
December 31 of the tax year that will be the last time you
will be claiming the deduction next year erase ka na
because you are already 22. Then those dependents who are
unmarried and not gainfully employed so if they got
married because you have the marrying age of 18 then
tanggal din sila for the purposes of additional exemption or
even if you are less than 21 but you are gainfully employed
then tanggal ka rin kasi you are now on equal footing of
your patents you have also your own personal exemption
may 50, 000 ka rin na deduction.
yung determination ngayon wala na, hindi na messy, hindi

na Malabo kasi ngayon pantay-pantay na so ngayon wala ng
bar question for that kasi simple na ngayon angh sagot
dyan. Noon maraming bar questions from this section pero
ngayon wala na masyado kasi straightforward na masyado
ang deduction for the purposes of personal exemptions.
Even yung the change of status hindi na confusing so if the
change of statis like if youre married unlike noon single ka
you got married on December 31 you have the right to
claim such exemption as married because you have
changed your status even if you got married at the last day
of the tax year hindi puwede even you got married on
December then yung sinlge mo idivide mo ng 12 so 1/12 eh
hahatiin mo yung portion, 1/12 yung married na exemption,
No! Thats confusing so tinanggal yun. Then death also sets
the tax payers will be able to claim their personal
exemptions for the last time kasi next year wala na estate
na yun.
Now the children referred to here are legitimate,

illegitimate or legally adopted child chiefly dependent
upon and living with the taxpayer even if they are studying
in Manila they are still qualified because they are only there
to study , uuwi din yan so they are still covered as
additional exemption. Then the amount is 25,000 but not
to exceed 4 dependents so king 5 kayong anak sa pamilya
only the first 4 until any one or the eldest is eliminated by
th
reason of age or by other circumstances then the 5 will
th
come in as the 4 qualified dependent so kung 6 or 7 kayo
eh maghintay yung iba until the elder ones are disqualified
then you come in for the purposes of additional exemption.
Then in the case of non-resident aliens in 35 D the NONRESIDENT ALIEN ENGAGED IN BUSINESS/TRADE are
only entitled to personal exemptions WALANG
ADDITONAL only the personal exemption. The rule here is
that the amount equal to the exemption allowed in the
income tax law which he is a subject or citizen, to citizens
of the Philippines not residing in such country , not to
exceed the amount fixed in this section as exemption for
citizens or residents of the Philippines. Provided, that said
non-resident alien should file a true and accurate return of
the total income received by him from all sources in the
Philippines, as required by this Title. The amount here is
that the, we give personal exemption to NRAEIB/T/P if in
their country they give also the country gives also
exemption to our non-resident citizens then so on the basis
of reciprocity we give a personal exemption then the next
question is how much, it is between the Phil. exemption
and the foreign personal exemption whichever is lower but
not to exceed the Philippine exemption so if the Philippine
exemption is 50 k sa kanila doon 30 K so we can give their
nonresindet alien 30 so if 60k sa kanila we can only give
50k so it is between the Phil. exemption and the foreign
personal exemption whichever is lower but not to exceed
the Philippine exemption
Now cjage of status. This was used to be a problematic item

before ngayon wala na kasi dati individuals exemptions
were determined by their statu, kung single ka ba, head of
the family or married or single ka and then there was
graduation of amounts so kung sinlge ka you were entitled
only to this 20,pag head of the family-25, pag-married ka
30. The Congress removed because theres a sense of
deprivation, partial deprivation kasi kung single ka ibig
sabihin ba you will spend less compared sa married or kung
sigle ka hindi ba pareho kayo ng kinakain ng married so
theirs is no distinction actually among the single, the
married and the head of the family pareho kayong
kumakain whether you eat at carenderia or five star
restaurants walang pinagkaiba yan so yung they were put
all of them in equal footing so yung status ng individual tax
payers tinanggal na yun so that elimated the confusion.
Unlike noon that is a source of bar question kasi tricky
SEPTEMBER 11, 2013

Lets go to Section 36.
SEC. 36. Items not Deductible.(A) General Rule. - In computing net income, no
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deduction shall in any case be allowed in respect to (1) Personal, living or family expenses;
(2) Any amount paid out for new buildings or for
permanent improvements, or betterments made to
increase the value of any property or estate;
This Subsection shall not apply to intangible
drilling and development costs incurred in
petroleum operations which are deductible under
Subsection (G) (1) of Section 34 of this Code.
(3) Any amount expended in restoring property or
in making good the exhaustion thereof for which
an allowance is or has been made; or
(4) Premiums paid on any life insurance policy
covering the life of any officer or employee, or of
any person financially interested in any trade or
business carried on by the taxpayer, individual or
corporate, when the taxpayer is directly or
indirectly a beneficiary under such policy.
(B) Losses from Sales or Exchanges of Property. - In
computing net income, no deductions shall in any case be
allowed in respect of losses from sales or exchanges of
property directly or indirectly (1) Between members of a family. For purposes of
this paragraph, the family of an individual shall
include only his brothers and sisters (whether by
the whole or half-blood), spouse, ancestors, and
lineal descendants; or
(2) Except in the case of distributions in
liquidation, between an individual and corporation
more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or
indirectly, by or for such individual; or
(3) Except in the case of distributions in
liquidation, between two corporations more than
fifty percent (50%) in value of the outstanding
stock of which is owned, directly or indirectly, by
or for the same individual if either one of such
corporations, with respect to the taxable year of
the corporation preceding the date of the sale of
exchange was under the law applicable to such
taxable year, a personal holding company or a
foreign personal holding company;
(4) Between the grantor and a fiduciary of any
trust; or
(5) Between the fiduciary of and the fiduciary of a
trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust; or
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(6) Between a fiduciary of a trust and beneficiary of

such trust.
Now Sec. 36 provides for certain items which are not
allowed to be claimed as a deduction against gross income.
In 36 (a), you have the following items.
In 36(a) number 1, in the case of personal, living or
family expenses.
These expenses are not deductible against gross income.
However, there is a way of claiming such deduction. It is by
way of personal and additional exemption.
Then you also have 2) Any amount paid out for new
buildings or for permanent improvements, or
betterments made to increase the value of any
property or estate;
Now these are what you call expenses for improvements.
Like you would do a repainting job of a building or you
would put up fences around the premises. Now for as long
as these expenses are related to the business or profession
of the taxpayer, these expenses will not be deductible
outright. There is a manner wherein which they may be
claimed as a deduction, but not under 34(a) as ordinary and
necessary UNLESS these are expenses for ordinary
maintenance and upkeep. Yung mga regular repairs na
gagawin. Now yung mga regular repairs, maintenance and
upkeep of the properties used in business or practice of
profession are deductible under 34(a) as regular, ordinary
and necessary expenses but when these expenses now
would involve betterments or permanent improvements,
then the manner of claiming the deduction is through
depreciation. So if you would cause the taxpayer to spend
about 1 billion for the repainting and for rehabilitating the
building of the taxpayer used in business. They spend so
much for the betterment and introducing improvements to
the building, and then when they are spent by the taxpayer,
they cannot be claimed as a deduction under 34(a). But the
manner of claiming the deduction is under 34(f) by way of
depreciation.
Now this Subsection shall not apply to intangible drilling
and development costs incurred in petroleum operations
which are deductible under Subsection (G) (1) of Section 34
of this Code. That is the claim of the deduction is through
the process of depletion.
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3.
Then you also have(3) Any amount expended in
restoring property or in making good the exhaustion
thereof for which an allowance is or has been made.
Again, if they are ordinary repairs, maintenance and
upkeep, they are deductible. But if they are spend in
restoring the property or improve or rehabilitate the
property, again for as long as they are used in business, kasi
if you have made substantial improvements to the
residential house, automatically they are not deductible
because they are not related to the business, trade or
profession.
Now anything which is related to the business or practice
of the profession amount spend which are for the
exhaustion of the property, then the deduction is done
through DEPRECIATION. You could not claim them
outright as a deduction under 34(B) as ordinary and
necessary expenses.
(4) Premiums paid on any life insurance policy
covering the life of any officer or employee, or of any
person financially interested in any trade or business
carried on by the taxpayer, individual or corporate,
when the taxpayer is directly or indirectly a
beneficiary under such policy.
Then you have also premiums paid on any life insurance
policy covering the life of any officer or employee, or of any
person financially interested in any trade or business
carried on by the taxpayer, like when the employee would
insure the life of the employee. The premiums paid by the
employer are not deductible when the employer is made
the beneficiary.
Now this is different when you treat this under fringe
benefit tax like when the employer would ensure their
executives, yung mga presidente nila, yung mga VPs nila,
managers, then it will be deductible on the basis of fringe
benefit tax deductible also on the basis of grossed-up
monetary value of the fringe benefit.
Now paragraph B are what we refer to as the related
taxpayers. Now under 36(B), no loss that will arise
between the taxpayer and these related persons:
1. Between members of the family under #1;
2. Between an individual and a corporation where the
individual owns substantially the corporation;
4.
5.
6.
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Between two corporations where the other

corporation owns more than 50% of the other
corporation;
Between the grantor and the fiduciary of any trust;
Between the fiduciary of a trust and the fiduciary of
another trust where the grantor is the same person
with respect to trust; and
Between the fiduciary of a trust and the beneficiary
of such trust.
So losses that will arise between these related persons, the

losses are not deductible. Now aside from that you have
interest expense. Pautang where interest expense is to be
paid but the pautang is between related taxpayers under
36(B), the interest expense under 34(B) is not deductible.
You have also bad debts as mentioned in 34(E). So bad
debts arising from related taxpayers under 34(E), the bad
debts are not deductible. So you have those rules.
Now on 37, these are deductions in connection with or
peculiar to insurance companies.
SEC. 38. Losses from Wash Sales of Stock or Securities.
(A) In the case of any loss claimed to have been sustained
from any sale or other disposition of shares of stock or
securities where it appears that within a period beginning
thirty (30) days before the date of such sale or disposition
and ending thirty (30) days after such date, the taxpayer
has acquired (by purchase or by exchange upon which the
entire amount of gain or loss was recognized by law), or has
entered into a contact or option so to acquire, substantially
identical stock or securities, then no deduction for the loss
shall be allowed under Section 34 unless the claim is made
by a dealer in stock or securities and with respect to a
transaction made in the ordinary course of the business of
such dealer.
(B) If the amount of stock or securities acquired (or
covered by the contract or option to acquire) is less than
the amount of stock or securities sold or otherwise
disposed of, then the particular shares of stock or
securities, the loss form the sale or other disposition of
which is not deductible, shall be determined under rules
and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner.
(C) If the amount of stock or securities acquired (or
covered by the contract or option to acquire which)
resulted in the non-deductibility of the loss, shall be
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determined under rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the
Commissioner.
Then you have losses from wash sales of stocks or
securities.
Now the provision is quite long but it is not tricky or
confusing. The rule here is that losses from wash sales of
stocks or securities, the losses are not deductible. Now but
income or gains from transactions of wash sales of stocks or
securities, the gain will always be taxable. Pagdating sa
deduction, issue yan whether deductible ba sya o hindi. In
the case of wash sales, the losses will not be deductible. But
if there is a gain, it is taxable. Ano ba itong transaction
where the ____ of wash sales, and a loss arises from this
sale of stocks or securities.
WASH SALES
2005 acquired 100 shares of A Corp.
P100,000.00
Case A: Nov. 2, 2012 acquired 100 shares of A Corp
P80,000.00
Nov. 27, 2012 sold 100 shares of A Corp.
P70,000.00 (LOSS)
Case B: Nov. 2, 2012 sold 100 shares of A Corp(2005)
P70,000.00
Nov. 27, 2012 acquired 100 shares of A Corp.
P60,000.00
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shares which he acquired in 2005, he acquired it for

P100,000.00. So there was a loss of P30,000.00.
In case B, the selling price here is still P70,000.00. So the
shares which he acquired in 2005 for P70,000.00, the cost
of the shares which he acquired way back in 2005 was for
P100,000.00. So there was a loss of P30,000.00.
So the issue ngayon is whether the taxpayer could claim the
losses from the sale of securities. Now this is an example of
wash sales because 30 days under Case A, 30 days before
the sale, he acquired substantially identical shares or 30
days after the sale in Case B, he acquired identical shares.
So within 30 days after the sale or within 30 days before the
sale, he acquired substantially identical shares. So for as
long as he acquired thats why we call it wash sales
because he replenished or have the same shares that he
sold at a loss when reacquired later. Thats why it is called
wash sale.
So in the case of wash selling, so this is the date of sale of
the securities and 30 days before the sale or 30 days after
the sale, there is an acquisition of similar or identical shares
to that which the taxpayer sold. So the sale was sold at a
loss. So the issue here is whether the loss can be claimed as
a deduction. Under Section 30(A), the losses from wash sale
are not deductible when you acquire similar or identical
shares 30 days before the sale or 30 days after the sale. Then
the loss that will arise will not be deductible. So that is the
rule in so far as treatment of losses from wash sales of
shares of stocks or securities.
Now we go to Section 39 the transactions involving
capital assets.
30 days before
date of sale
30 days after
Now this contemplates of a transaction involving the sale of

stocks or securities. So lets say the taxpayer on 2005
acquired 100 shares of A corporation for P100,000.00.
Where on November 2, 2012, the taxpayer acquires another
100 shares of A corporation for P80,000.00. So this is Case
A. And then, on November 27, 2012, sold 100 shares of A
corporation which he acquired in 2005 for only P70,000.00.
Now for Case B. On November 2, 2012, the taxpayer sold 100
shares of the A Corporation which he acquired on 2005 for
P70,000.00. Then on November 27, 2012, he acquired 100
shares of A Corporation for P60,000. So under Case A, the
selling price of the 100 shares is P70,000.00. The cost of the
SEC. 39. Capital Gains and Losses. (A) Definitions. - As used in this Title (1) Capital Assets. - the term 'capital assets' means
property held by the taxpayer (whether or not connected
with his trade or business), but does not include stock in
trade of the taxpayer or other property of a kind which
would properly be included in the inventory of the taxpayer
if on hand at the close of the taxable year, or property held
by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or property used in
the trade or business, of a character which is subject to the
allowance for depreciation provided in Subsection (F) of
Section 34; or real property used in trade or business of the
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taxpayer.
(2) Net Capital Gain. - The term 'net capital gain' means
the excess of the gains from sales or exchanges of capital
assets over the losses from such sales or exchanges.
(3) Net Capital Loss. - The term 'net capital loss' means
the excess of the losses from sales or exchanges of capital
assets over the gains from such sales or exchanges.
(B) Percentage Taken into Account. - In the case of a
taxpayer, other than a corporation, only the following
percentages of the gain or loss recognized upon the sale or
exchange of a capital asset shall be taken into account in
computing net capital gain, net capital loss, and net
income:
(1)One hundred percent (100%) if the capital asset has been
held for not more than twelve (12) months; and
(2)Fifty percent (50%) if the capital asset has been held for
more than twelve (12) months;
(C) Limitation on Capital Losses. - Losses from sales or
exchanges of capital assets shall be allowed only to the
extent of the gains from such sales or exchanges. If a bank
or trust company incorporated under the laws of the
Philippines, a substantial part of whose business is the
receipt of deposits, sells any bond, debenture, note, or
certificate or other evidence of indebtedness issued by any
corporation (including one issued by a government or
political subdivision thereof), with interest coupons or in
registered form, any loss resulting from such sale shall not
be subject to the foregoing limitation and shall not be
included in determining the applicability of such limitation
to other losses.
(D) Net Capital Loss Carry-over. - If any taxpayer, other
than a corporation, sustains in any taxable year a net
capital loss, such loss (in an amount not in excess of the net
income for such year) shall be treated in the succeeding
taxable year as a loss from the sale or exchange of a capital
asset held for not more than twelve (12) months.
(E) Retirement of Bonds, Etc. - For purposes of this Title,
amounts received by the holder upon the retirement of
bonds, debentures, notes or certificates or other evidences
of indebtedness issued by any corporation (including those
issued by a government or political subdivision thereof)
with interest coupons or in registered form, shall be
considered as amounts received in exchange therefor.
(F) Gains or losses from Short Sales, Etc. - For purposes
of this Title (1) Gains or losses from short sales of property shall be
considered as gains or losses from sales or exchanges of
26
capital
assets;
and
(2) Gains or losses attributable to the failure to exercise
privileges or options to buy or sell property shall be
considered as capital gains or losses.
Now capital assets under Sec. 39 defines at the outset what

are capital assets and capital assets here are defined as
property held by the taxpayer (whether or not connected
with his trade or business), but does not include:
1. stock in trade of the taxpayer or other property of a
kind which would properly be included in the
inventory of the taxpayer if on hand at the close of
the taxable year; or
2. property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or
business; or
3. property used in the trade or business, of a
character which is subject to the allowance for
depreciation provided in Subsection (F) of Section
34; or
4. real property used in trade or business of the
taxpayer.
So in other words, the capital assets are the properties not
used in business. Yun ang ibig sabihin nun. But it is defined
through enumeration. And defines it in a negative. So those
which are not are capital assets. So if the properties are not
used in business, trade or profession, they are capital
assets. So the residential house, the family car, the
collection of paintings of the taxpayer, the furniture and
fixtures found at home or investments of the taxpayer. So
you are a lawyer or an accountant, you have investments in
shares of stock. You would buy shares of stock in the stock
market, then the acquisitions are capital assets because
they are not used in business. But if you are a regular stock
trader then these shares of stocks you will acquire in the
stock market are not anymore capital assets. They are what
you call ordinary assets because they are used in business.
So those assets which are used in business are what we call
ordinary assets and the income that we gain from these
ordinary assets are what we call ordinary gain. And in the
case of capital assets that will be sold, and there will be a
resulting gain, you call it a capital gain. If it would result
from a loss, then it will be called a capital loss. So gains and
losses from a capital asset are called capital gain or capital
loss.
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27
The issue under Sec. 39 is the taxation of gains from capital

assets and the treatment of the losses. Now earlier, prior to
Sec. 39, we have been dealing over the tax treatment of
certain capital assets.
and ilan yung gains, you deduct the losses against the gains
and you end up with a net capital loss or a net capital gain.
So but in determining the loss, you have in Sec. 39(B),
percentage is taken into account.
1. You have the sale of real properties treated as

capital assets wherein this would be the subject of
6% capital gains tax based on the selling price or
fair market value whichever is higher. So may
taxation na tayo dun, kung ano ang tax treatment
over the sale of real properties which are not used
in business.
2. We have also taken up the shares of sale of stock of
those traded at a Philippine Stock Exchange. So
this will be taxable under Sec. 127 wherein it will
be subject to of 1% of the selling price. So may
taxation na tayo over shares of stock traded at the
stock market or Philippine Stock Market. For the
not traded, this will be subject to the 5% for the
net capital gain not exceeding P100,000 then the
net capital gain exceeding P100,000 is 10%. So you
have that 5% and 10% tax for shares of stock not
traded at the stock exchange.
3. The third part is what is being talked about under
Sec. 39. The taxation of all other capital assets not
real properties and not shares of stocks that will
be dealt with under Sec. 39.
So in case of a taxpayer other than a corporation so this

would apply only on individuals. So if an individual sells his
jewelries. So sample tayo.
So the familycar, in case of a gain, it will be taxed the

treatment will be covered by Sec. 39. If the family home is
sold, it will be taxed under 6%. If the paintings at home will
be sold, it will be taxed under Sec. 39. If the furniture and
fixture will be sold at a loss or a gain, the treatment will be
under Sec. 39. When shares of stocks are sold by the
taxpayer in his investments in money market or some other
shares, the taxation will be traded or not traded. So you
have that treatment.
So ano ba yung nasa Sec. 39? Now when capital assets sold
at a gain, you have what you call a capital gain and when it
is sold at a loss, you have a capital loss. Now when you have
capital loss, the capital loss is not deductible against gross
income but the capital loss is deductible only when you
have capital gains. So in other words, at the end of the tax
year, you will now consolidate your cap gains and cap
losses which are neither shares of stock or real properties
kasi may separate tax treatment na sila. It refers to the
other capital assets that you have disposed during the tax
year and the resulting transaction may either be a loss or a
gain. So you consolidate, kung ilan yung capital losses mo
Taxpayer A sold jewelries for P100,000 acquired in 2005. So

the family car for P900,000 which was acquired in February
2012 for P750,000. Ito yung transactions. In number 1, the
jewelries were sold at a selling price for P100,000. This was
acquired in 2005, the cost of which is P80,000. So he had a
gain of P20,000. In number 2, he sold the family car in the
tax year 2012 for P900,000, the cost of that car which he
acquired even during that year (February 2012) for
P750,000. So he has a gain of P150,000. Dagdag tayo ng loss.
So he sold his paintings for P300,000 which he acquired in
2009 for P350,000. So in this transaction, the selling price
of the paintings P300,000, the cost of which in 2009 is
P350,000. So he had a loss of P50,000.
Now if the taxpayer is a corporation, this will be the
recognition of the gains and losses. The rule in 39 applies
when the taxpayer is an individual. In the case of a taxpayer
other than a corporation, only the following percentages of
the gain or loss recognize on the sale or exchange of capital
assets shall be taken into account in computing the net
capital gain, the net capital loss and net income: One
hundred percent (100%) if the capital asset has been
held for not more than twelve (12) months; and fifty
percent (50%) if the capital asset has been held for
more than twelve (12) months.
In other words, the gains and losses in a transaction
involving the capital assets, in the case of an individual, the
recognition whether you account 100% of the gain or 100%
of the loss will depend on the length of time that asset has
been held by the taxpayer. In problem #1, the property was
acquired in 2005. It was sold in 2012 for P100,000. He made
a gain of P30,000. Is A entitled to claim 100% of the gain?
Under 39(B), NO. he is allowed only to recognize 50% of
the gain if the asset is acquired for more than 1 year or has
been held for more than 12 months. So the allowable loss or
the allowable gain will only be 50%, which is P10,000. Yan
lang yung allowed to the individual. Kung corporation yan,
you have the entire P20,000 because the holding period is
not applicable to the corporation. so the individual,
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applicable yung holding. But if it was acquired for over a
year, 50% lang yung iirecognize.
In transaction #3 which was acquired in 2009 sold in 2012,
there was a loss of P50,000. Now in the case of a
corporation, this will be the actual loss that will be
recognize. But in the case of the individual, the allowable
loss will only be 50% because this has been held for over
one year. It was acquired way back in 2009. And you are
talking of 2012 tax year. So only 50% or P25,000 will be
allowable loss that will be recognized in the case of the
individual who will incur that loss, not the entire loss.
In transaction#2, the family car was acquired also in the
same tax year, then 100% of the gain will be recognized. So
the allowable gain here will be also P150,000. In the case of
a corporation, P150,000 din it wont apply the holding
period. Now had this been a loss, so the entire loss will be
recognized. Like if the family car was sold for P700,000,
inacquire mo for P750,000 during the same tax year, then
the loss of P50,000, the entire loss will be recognized.
Then we will consolidate. So you have for corporation and
then individual. Cap gains nya sa corporation you have the:
P20,000, in the case of the jewelries sa corporation the
entire P20,000 but sa individual hanggang only up to
P10,000. Only 50% will be recognized. Another gain that
was made is yung family car: sa corporation P150,000 tapos
sa individual P150,000 din because this was acquired also
during the tax year. 100% of the gain will be recognized. So
this is your total cap gains: in the case of the corporation
P170,000. Sa individual P160,000.
LESS cap losses. The cap losses during the tax year itong
paintings na binenta mo. In the case of a corporation, the
entire P50,000 will be claimed as a cap loss wala kang
holding period to account for. In the case of the individual,
only 50% because this was acquired for over a year, you
have P25,000. So you have your net capital gain or you may
have a net capital loss. Whenever your capital losses are
more than your capital gain, then you end up with a capital
loss. But in this case, you have more gains than losses, you
end up with a net capital gain of P170,000 minus P50,000
equals P120,000. This is your net capital gain. Sa individual
yung P160,000 over P25,000, you have P135,000 net capital
gains.
Ang issue ngayon, what is the tax treatment of the P120k
and P135k? Now, this P120k will be added to the regular
28
income of the corporation, taxed at 30% yung corporate

rate. Yung P135k net capital gain is added to the regular
income of the individual taxable at 5-32%. Kino-consolidate
ito. This will be added to the regular income. So if you are a
compensation income earner, what remains from your
compensation after the exemptions, idagdag mo yung P135k
and the total or consoliodated taxable income will now be
taxed from 5-32%. When you go to early provisions from
Sec. 24 upwards, you will not encounter a tax treatment
over these types of capital assets unlike real properties or
shares of stock, meron syang sariling treatment. So if that is
corporate, then ito kasi it will form part of the other
income of the corporation or the other income of the
individual. So the individual being taxed at 5-32% as
provided dun sa table which was given to you noon. The 532% is the all-embracing umbrella tax rate yan for all other
income not subject to preferential or specific tax rate.
Likewise, in the case of corporations, the 30% taxable
income will also be the same tax rates to all other income
not subject to a preferential or specific tax treatment. So
yan yung illustrated or explained under Sec. 29, pano yung
tax treatment over the net capital gain. So kung individual
sya, 5-32%. Kung corporation 30% will be added to the
regular income.
Now you have 39(C). what if you end up with a net capital
loss. Now, if you end up with a net capital loss, if you are a
corporation that will be a loss forever under 39(D). If you
are an individual, the net capital loss is allowed to be
carried over in the next tax year. In 39(D), if any taxpayer
other than a corporation, so if a corporation would involve
a net capital loss, there is no carry-over allowed. Only the
individuals will be given that privilege to have a capital loss
during the tax year be carried over the following tax year.
So any taxpayer sustains in any taxable year a net capital
loss, such loss in an amount not in excess of the net income
for such year shall be treated in the succeedingtaxable year
as a loss from the sale or exchange of the capital assets held
for not more than 12 months. In other words, yung net
capital loss mo can be carried over to the next taxable year
subject to the rules that losses are deductible against
capitable gains. In other words, magiging fresh cap loss sya
in the following tax year of which in ___ them you have to
have a capital gain because these losses can only be
deductible if you have capital gains.
Now the carry-over is allowed only in the following tax
year. However, the amount of the loss that will be allowed
will depend on the amount of the taxable income that was
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made by the taxpayer on the year the loss was sustained. So
lets say, the taxable income is P80,000. The net capital loss
was P200,000. So the net capital loss carry-over should not
exceed in an amount not in excess of the net income for
such year. So the amount of loss that you are allowed to
carry-over should not exceed the net income for the year
the loss was sustained. So in the following year, the allowed
loss that you are allowed to carry-over is not the entire
P200,000 but only to the extent of the taxable income of
the year of the loss was sustained. So you are only allowed
to carry over P80,000. Had the taxable income been
P250,000, then you are allowed to carry-over the entire
P200,000 because the ceiling is not to exceed the taxable
income. So if the taxable income is only up to P80,000 and
the loss is more than your taxable income, then whichever
is lower. You are allowed only to carry-over as much as
P80,000. That is the amount to be carry-over. Now asked in
the BAR, what are capital assets? Hindi na tinanong kung
pano yan dinerive. The purpose there is to figure out when
you end up with gains, a consolidated capital gains during
the tax year, anong tax treatment and the tax treatment
would depend sa taxpayer, kung individual ba sya or
corporation.
Now short selling in 39(F) are selling properties which at
the time of sale you do not own them yet. So you are selling
properties which you do not own at the time of the sale, so
they are called short selling. So gains or losses from short
sale of property shall be considered gains or losses from
sale or exchanges from capital assets.
SEC. 40. Determination of Amount and Recognition of
Gain or Loss. (A) Computation of Gain or Loss. - The gain from the
sale or other disposition of property shall be the excess of
the amount realized therefrom over the basis or adjusted
basis for determining gain, and the loss shall be the excess
of the basis or adjusted basis for determining loss over the
amount realized. The amount realized from the sale or
other disposition of property shall be the sum of money
received plus the fair market value of the property (other
than money) received;
(B) Basis for Determining Gain or Loss from Sale or
Disposition of Property. - The basis of property shall be (1) The cost thereof in the case of property
acquired on or after March 1, 1913, if such property
was acquired by purchase; or
(2) The fair market price or value as of the date of
acquisition, if the same was acquired by
29
inheritance; or
(3) If the property was acquired by gift, the basis
shall be the same as if it would be in the hands of
the donor or the last preceding owner by whom it
was not acquired by gift, except that if such basis is
greater than the fair market value of the property
at the time of the gift then, for the purpose of
determining loss, the basis shall be such fair
market value; or
(4) If the property was acquired for less than an
adequate consideration in money or money's
worth, the basis of such property is the amount
paid by the transferee for the property; or
(5) The basis as defined in paragraph (C)(5) of this
Section, if the property was acquired in a
transaction where gain or loss is not recognized
under paragraph (C)(2) of this Section.
(C) Exchange of Property. (1) General Rule. - Except as herein provided,
upon the sale or exchange or property, the entire
amount of the gain or loss, as the case may be,
shall be recognized.
(2) Exception. - No gain or loss shall be
recognized if in pursuance of a plan of merger or
consolidation
(a) A corporation, which is a party to a
merger or consolidation, exchanges
property solely for stock in a corporation,
which is a party to the merger or
consolidation; or
(b) A shareholder exchanges stock in a
corporation, which is a party to the merger
or consolidation, solely for the stock of
another corporation also a party to the
merger or consolidation; or
(c) A security holder of a corporation,
which is a party to the merger or
consolidation, exchanges his securities in
such corporation, solely for stock or
securities in such corporation, a party to
the merger or consolidation.
No gain or loss shall also be recognized if
property is transferred to a corporation by
a person in exchange for stock or unit of
participation in such a corporation of
which as a result of such exchange said
person, alone or together with others, not
rd

exceeding four (4) persons, gains control
of said corporation: Provided, That stocks
issued for services shall not be considered
as issued in return for property.
Now sec. 40 provides for the recognition of gains or losses.

The simple rule is here is that SELLING PRICE minus
COST, you end up with up with a gain or a loss. Thats a
simple formula. Simple arithmetic. You have only the
selling price over the cost of the property sold, you have a
gain or you may have a loss. So if you sell the property
more than the cost, you have a gain. If you sell the property
less than its cost, then you end up with a loss. What is
important on Sec. 40 is on matters of exchange of property.
So when properties are exchanged, like real properties. So
lot A is exchanged with lot B, so the expecting owners
made a deed of exchange from the real properties. Is that
exchange taxable? Yes, the exchange is taxable. When you
go to Sec. 24 when real properties are exchanged with other
real properties or you have a deed of exchange, the capital
gains tax from the sale of real property does not cover only
the regular sale, it includes aside from the sale, exchange or
other disposition of real property classified as capital assets.
So sino ang magbabayad ng capital gains tax? Kayong
dalawa na nagexchange, the owner of Lot A will pay the
capital gains tax on the property and the owner of Lot B
will also pay for the capital gains tax for the part of the real
property na pinart with nya. So dalawang capital gains tax
ang involve dyan kung may exchange of real property.
Now, going back to sec. 40. You have that general rule:
upon the sale or exchange of property, the entire amount of
the gain or loss, as the case may be, shall be recognized. So
kung may gain, taxable. Kung may loss, so kung ano yung
applicable rule. Now, the exception: No gain or loss may
be recognized in the pursuance of a plan of merger or
consolidation. So in a regular merger or consolidation, you
have two or more corporations merging and there is a
surviving corporation. So in the case of merger, A, B and C
will merge and C will be the surviving corporation. Thats a
merger. And if A, B , and C will combine and a new
corporation is created, that is consolidation. So if any of the
combining corporation will survive, that is a merger. But if
a new corporation is created by reason of the combination,
then that is a consolidation. So but what happens here is
that whatever it could be, whether a merger or a
consolidation, the corporation na magsasarado by reason of
the combination, therefore there should be exchange of
30
shares of stocks of the surviving corporation or the new

corporation that will be formed, so stockholders A and B,
their shares of stock will be exchanged for the shares of
stock of C corporation which is surviving or in the case of
the consolidation, the stockholders of A, B and C
Corporation, their shares of stock will be exchanged of the
D Corporations shares of stock in the case of consolidation.
Now, is it taxable? The answer is NO. because no gain or
loss shall be recognized in the case of a merger or
consolidation. Now another exception, we have the last
paragraph on number 2.
No gain or loss shall also be recognized if property is
transferred to a corporation by a person in exchange
for stock or unit of participation in such a corporation
of which as a result of such exchange said person,
alone or together with others, not exceeding four (4)
persons, gains control of said corporation.
So a corporation is formed and you are invited to become
an incorporator of that corporation. Instead of contributing
cash, you contributed your real property to the corporation
that was formed. So a deed of exchange will be executed
wherein yung real property mo will be contributed as your
capital to the corporation, in exchange of that iisyuhan ka
ng shares of stocks. So yung lupa mo magiging papel na
lang sya, magiging shares of stock, of equivalent value of
course. So that is also non-taxable. No gain or loss shall be
recognized. So such exchange shall not be subject to tax.
So as to close that discussion, the operation of the no gain
or loss because the rule here is that it is not taxable, but the
operation of its non-taxability is not automatic. In other
words, if you would execute lets say a deed of exchange na
yung lupa mo papalitan ng shares of stock ng isang
corporation which you are one of the incorporators, then it
is required that a tax will be paid. So pano ka hihingi ng tax
clearance for that transaction. What is done usually is you
must ask for a tax ruling in the BIR. So the taxpayer will
write to the BIR that he is going to enter into this
transaction where his real property will be exchanged for
shares of stock of a corporation. and under Sec. 40, such
exchange is not taxable. Then, the Commissioner of the BIR
will make a ruling on the basis of the documents etc. that
this transaction is not taxable. Now kasi kung walang ruling
yan, when you ask for a tax clearance, you cannot go the
BIR and then assert na under Sec. 40, exempted yan.
Because when you invoke Sec. 40, you cannot invoke the
statutory provision, you must have a ruling from the
rd

Commissioner that that is exempted. Otherwise, subject
yan sya to the capital gains tax. So you should file a capital
gains tax return, then you attach the ruling in the return.
Para pag check ng examiner, there is a ruling na exempted
ang transaction. Then you will be given a clearance. It is
not the Commissioner who will give you the clearance. Ikiclear ka muna sa Revenue District Office mo where the
property is located that the transaction is exempted by
reason of the BIR Commissioners ruling. So bibigyan ka ng
clearance, you go now to the ROD, have the title
transferred, then nasa corporation na ang titulo, you will be
given now the shares of stock.
Section 40
Provides for the treatment to the transaction involving
extremes. When property are exchange whether for other
properties or shares of stock as a rule that tis taxable
transaction. In event that there is gain, the gain will be
taxable. What is more important are the provision of
paragraph C of section 40 involving exchange change in the
property.
1) General Rule. - Except as herein
provided, upon the sale or exchange or
property, the entire amount of the gain or
loss, as the case may be, shall be
recognized.
(2) Exception. - No gain or loss shall be
recognized if in pursuance of a plan of
merger or consolidation
When shares of stocks are exchange, pursuant to a plan of
merger or consolidation coping with loss is recognized
there. There is what we call an exchange or transfer of
capital that is why coping of loss is recognized here. When
two or more corporation merge and there is one surviving
corporation so the holding corporation, the shareholders,
will be exchange for the shares of stocks of the surviving
corporation. No gain or loss will be recognized because
there would only be a change of capital. Likewise, when
you have consolidation, like two or more corporations
combining and there is new corporation is created, you
have consolidation. The corporation will close because
there is a new corporation that is formed. The former
sto0ck holders share will be issued of exchange for the new
share of the new corporation which will created. Again no
31
gain or loss is recognized because there was a transfer of

capital.
(a) A corporation, which is a party
to a merger or consolidation,
exchanges property solely for
stock in a corporation, which is a
party
to
the
merger
or
consolidation; or
(b) A shareholder exchanges stock
in a corporation, which is a party
to the merger or consolidation,
solely for the stock of another
corporation also a party to the
merger or consolidation; or
(c) A security holder of a
corporation, which is a party to
the merger or consolidation,
exchanges his securities in such
corporation, solely for stock or
securities in such corporation, a
party
to
the
merger
or
consolidation.
No gain or loss shall also be recognized if
property is transferred to a corporation by
a person in exchange for stock or unit of
participation in such a corporation of
which as a result of such exchange said
person, alone or together with others, not
exceeding four (4) persons, gains control
of said corporation: Provided, That stocks
issued for services shall not be considered
as issued in return for property.
In the last paragraph above, when a corporation is creating
this transaction involving when a corporation is organized
and one of the incorporation or stock holders instead of
contributing with cash or contributing with property
exchange for shares of stocks, then no gain or loss will also
be recognized. Again there is only a change and transfer of
capital. You property which be your capital would be
contributed to the corporation for exchange piece of a real
property. In exchange for such real property, will be the
corresponding shares of stocks. So, there is only a change of
capital. No gain or loss is recognized.
rd

32
When you have a family corporation, prior to set up a

family corporations, the business was owned as a single
proprietorship by the parents. When the children then,
became old, they participate in the running of the affairs of
the running of the family business. The parents now will
convert the business form single proprietorship to a family
corporation. The assets of the single proprietorship will be
contributed by the parents to the new corporation that will
be formed. The assets or properties that would be brought
to the new corporation will be exchange for shares of stocks
for these are owned by the parents. The parents now will
form a family corporation. The holding of the parents in
form of properties they owned will be converted into shares
of stocks. In that transfer or exchange, no gain or loss that
is recognized. There is only a change of capital.
Section 41. Inventories. - whenever in the judgment of the

Commissioner, the use of inventories is necessary in order
to determine clearly the income of any taxpayer,
inventories shall be taken by such taxpayer upon such basis
as the Secretary of Finance, upon recommendation of the
Commissioner, may, by rules and regulations, prescribe as
conforming as nearly as may be to the best accounting
practice in the trade or business and as most clearly
reflecting the income.
As we mentioned last time, the operation of the nontaxability of exchange is not self-executory. It is because
when you enter to such kind of transaction, the law
provides that it is tax free. But after you make the
documentation, you go the BIR to have the property be
subject to tax for an exemption, the BIR will not grant an
exemption. What was usually done here is you have to ask
for a tax ruling to write the BIR commissioner that you are
entering for the exchange of a piece for property be
exchange for a piece of stocks of corporation and under
section 40 such transaction is tax free.
The inventory is one of the method by the BIR to

determine movement of taxable income. it is most specially
apply to those of merchandising business, where they are
engage in buying and selling merchandise, movement of
the stocks in trade will determine WON they will income.
The inventory is what we called the return of capital. It is
because what you have, sales less cost this represent your
capital. From the cost of the sales is your gross income. The
flow of wealth which goes into the hands of the taxpayers
other than the return of capital. After deducting the cost of
sales is your income and this income when engaged in
business, trade or profession, will be entitled to claim
deduction to come up with what you have, net income or
for corporate entities, this will be detachable income. For
individuals it is net income because it will be subject to
personal deductions.
The commissioner now will make a reply to your query and

issue a ruling won the exchange of the transaction will be
tax free under section 40. In its reply the BIR will issued a
ruling pursuant to section 40. When you deed of exchange
together with you BIR ruling, and you file also a capital
gains tax return and a documentary tax return, because of
the deed of exchange of real property in exchange of shares
of stocks , without a ruling that would be subject to a
capital gain tax and the correspondent documentary stamp
i
tax. s o what are you going to apply is a capital gain tax
return, documentary stamp tax, and attached therewith is a
tax ruling so that the BIR will issue a tax clearance and
authority for registration the transfer. You would now be
given that tax clearance that is exempted by reason of the
BIR ruling under section 40 of NIRC, then all these
clearance now, all the deeds to bring this now to the
registered of deed for the issuance of another title, then the
corporation will corresponding issued also the shares of
stocks in exchange for that real property.
So we have now section 41. Under section 41 we are now

technically out of the forest (^o^). We are through to the
most crucial provision under deduction. You section 32-3940. Most important is 34-35. Try to go back to those
provisions while we go to other provisions.
The inventory is found under the determination of your

cost stage. When you have movements of the inventory of a
tax payer that will also be determining movements of you
income. pag umakyat and cost of sales mo, it means
unmakyat rin ung income mo. This cost of sale specially if
you are engaged in buying or selling business, it is
determined by the inventory beginning, it is you stocks of
sales at the beginning of a taxable year.
Ex. So if you are using the calendar year on January 1 , that
is your beginning inventory, these are the merchandise
available for sale to you customer and these has also has
own variation, the variation of your own inventory. Then
you add from the inventory beginning the purchases that
you have made during the year. These are the purchases
you buy special when you are doing the conduct of the
rd

merchandise. Like you are a hardware or a store selling
construction materials. You have arrayed of the different
construction materials. You have urn purchases during the
year and the total of this merchandise available for sale
then less merchandise sold during the year. What is left is
your inventory that year. This would the merchandise
available at the end of the tax year. This inventory pending
is your inventory beginning in the next tax year.
monitor the price of the products. What is important is

that, for purposes of inventory taking, the taxpayers are
given method for sound accounting process to enjoy the
method of determine inventory. They may use
This cost of sale actually is the cost if the merchandise

which were sold during the tax year. The pending inventory
represents those merchandise which were not sold at the
end of the tax year. The merchandise you did not sold at
then of the tax year is the beginning inventory of January 1
of the following year. That how the cost of sales. It is
determine by this value of the inventory of this
merchandise sold during the end of the tax year. So less the
cost of sales, that would be the determination of your gross
income. It is the same as, on a simple gain or exchange of a
real property where you have the selling price less the cost
then you have a gain or a loss. On a simple term, the selling
price of a product lessen the cost is the gain. In a larger
scale, the sales in the business less than the cost of the sales
is your gross income. This is the basis for the taxability not
the sales because sales includes capital.
In section 41 Section 41. Inventories. - whenever in the
judgment of the Commissioner, the use of inventories is
necessary in order to determine clearly the income of any
taxpayer, inventories shall be taken by such taxpayer upon
such basis as the Secretary of Finance, upon
recommendation of the Commissioner, may, by rules and
regulations, prescribe as conforming as nearly as may be to
the best accounting practice in the trade or business and as
most clearly reflecting the income.
Inventory taking is crucial because that would also
determine whether you have reported the right income.
There is a middle for of valuing. What will be the
reasonable valuation in your inventories or the
merchandise in the business? Among the methods of
valuing inventory, there will you the first in first out.
ST
st
1 in 1 out. Kung ano ung unang na purchase that would

st
be the 1 out for purposes of determining the cost of sales.
It is because price of products are not usually the same. Iba
iba nag presyo ng suppliers mo. After 4 months ito nlng
ang presyo ng product mo. So what would be a reasonable
st
st
conclusion of the 1 in 1 out. But nowadays they can now
33
st
st
1 in 1 out
Averaging method of inventory- meaning they
average the price. They set a price of a product
then they use that to determine the value of the
merchandise.
st
Last in 1 out- but then there is a revenue
memorandum circular that the BIR would not
st
allow anymore the use of last in 1 out. Thats the
st
st
opposite of 1 in and 1 out. It is on year 2000
providing that inventory valuation method
adopted by the taxpayers should be applied from...
st
Last in 1 out is not acceptable for income tax
st
st
purposes. The most common one is the 1 in 1 out.
The last purchase price of the product- the price of
the is what they will you as a price for valuation
purposes.

Taxation TSN 3 Exam Coverage Summary

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Taxation TSN 3 Exam Coverage

Our deductions are categorized as follows:

Taxation TSN 3 Exam Coverage

You also have depletion, wherein peculiar only to mining

Taxation TSN 3 Exam Coverage

claim for additional exemption but it does not exceed 50k

Taxation TSN 3 Exam Coverage

The expenses must be ordinary and necessary.

beyond the current year, then the deduction

The second requirement is that it must be paid or incurred

You have this pay incurred when you have an

Taxation TSN 3 Exam Coverage

The rental of the condo unit, rental of the

The fourth requirement is that it must be substantiated

Example, mga resibo or acknowledgement to

The fifth, if the expense requires a withholding, then a

Kickbacks, bribes, are not deductible expense.

Those are elements/ requirements for deductibility.

amusement purposes as long as they are for trade, business

Taxation TSN 3 Exam Coverage

deduction from gross income: Provided, however,

Taxation TSN 3 Exam Coverage

The exception is on the 2 part that Provided, however,

Again that is applied only when the transaction

Taxation TSN 3 Exam Coverage

- ito yung tinatawag natin borrowing between related

So, under this situation you are not allowed to

Between members of a family. For purposes of this

(c)If the indebtedness

The indebtedness is not deductible. It does not mean you

Taxation TSN 3 Exam Coverage

Under the herein transaction, the taxpayer borrowed

Ex. When you purchase a delivery truck in a business and

The basic rule on taxes are those in connection with the

The issue now under this set of transaction the

- while it is a tax, it is not a deductible tax.

(a) The income tax provided for under this Title;

(b) Income taxes imposed by authority of any foreign

Taxation TSN 3 Exam Coverage

Ex. Supposed if during the tax year a portion of your

D) Losses. as long in connection to the taxpayer BTP.

(c) No loss shall be allowed as a deduction under this

Taxation TSN 3 Exam Coverage

Taxation TSN 3 Exam Coverage

demand letters it was ignored then you file a case. A

Sec. 34(E) par.1 NIRC

Taxation TSN 3 Exam Coverage

Sec. 34(E) par.2 NIRC

losses can never be deductible on your gross income. They

Taxation TSN 3 Exam Coverage

(2) DECLINING BALANCE METHOD Depreciation rate = 1/estimated life x 2 OR 1.5

(2) Use of Certain Methods and Rates. - The term

Annual Depreciation = no. of remaining life x cost scrap

Sec. 34 (F), paragraph 1

Taxation TSN 3 Exam Coverage

Operations. - an allowance for depreciation in respect of

Taxation TSN 3 Exam Coverage

1 year of operation 50,000,000 units

2 year of operation 100,000,000 units

What happens when on the 5 year of operation kay fully

connected to the taxpayers trade, business or exercise of